VBND vs VAF vs VGB

I think you're really simplifying bonds(debt from here on out this post) to a large extent in a business setting. A business(human enterprise) is typically funded by a mixture of both debt & equity and they each serve different purposes.

Without debt investors, equity investors have to stump up all the capital required for a business and equity is the most expensive form of funding in my humble opinion(as a business operator). With debt, I don't have to split my profits outside of a small amount of interest which is tax deductible. A small, prudent amount of debt amplifies my equity gains so I'm very thankful debt investors exist.

When I look at successful debt investors such as Oaktree, 20% p.a. ish returns after fees, investing primarily in debt instruments, since 1995. I'd be very happy with those sort of returns. Investing in debt isn't necessarily about just clipping the coupons.

 

He he, as I was typing my post that thought was in my mind but I was hoping no one picked up on it.

For well over 3 decades I’ve been an equities tragic which has contributed substantially to the wonderful retirement we’re enjoying now. Hence I’m very biased toward equities and it’s growing income stream in particular.

 

Oaktree is an extremely active bond manger specialising in high yield and distressed debt.

Yep buying distressed debt as leverage in a re-capitalisation or turn around can be lucrative (or not) for a deep value manager if you have done your homework very well, but what has it got to do as a justification for passive bond allocation?
(An allocation to a distressed debt fund as part of my active allocations would get a gig from ne way before a passive allocation to investment grade bonds).

The fact that debt repayment is limited to the fixed face value and coupon (other than speculative repricing) is the very reason why it can’t participate in the upside of human endeavour, only equities can do that passively.

Access to low cost debt may be good for business. I’m happy for others to lend it to them. But I’m with @Nodrog on this, my capital is being directed to equity ownership to capture the upside of human endeavour.

The discussion on this thread has been good. Great contributions from many angles.

Bonds themselves are multi-faceted. Peoples circumstances are all different. We are all going to view bonds differently and that’s the way it should be.

 

Not knowing much about it but I had always thought with Oaktree and other similar managers in distressed debt the plan is usually a heads I win, tails I win type deal. Deals are approached with a view to recapitalising on default and taking the business over for subsequent sale once the ship is righted (if possible). So they clip the coupon on the way down and then step in to an equity position which may have considerable upside. I'd consider this in the bottom feeder category of human enterprise, but enterprise nonetheless!

 

Thanks mate.

It’s funny how we’re all wired differently in regard to investing / risk.

Even though I know what the severe drawdowns of equities and their durations historically can be I sleep like a baby. However when I looked at VIF’s Average Weighted Maturity of around 10 years and Yield to Maturity of 0.89% I’m crapping myself at the thought of investing in such a fund. Then there’s a big difference in our stage of life. You being much younger have time for turnover / reinvestment in a longer duration Bond Fund to sort itself out.

 

The Bondies copped it a bit in this thread so I thought I’d post this piece from Swedroe which offers a more conservative view for those “who’ve won the game”:

How Do You Know When You Have Enough?

 

This is the exact situation we are in.

I’m 7/8 retired, my wife still earns six figures.

We have by most standards more than enough.

Lots more is always nice (and we are bigger spenders than some here) but it won’t make anywhere as much as a difference as blowing a chunk in it would.

Were I not the controlling type I’d just chuck the lot into VDBA.

 

In relation to being more conservative the “fear of inflation” is often used to counter it. I haven’t validated it but I’ve seen as little as 30% equities / 70% bonds from supposed professionals being enough to protect the overall portfolio against most inflation. The amount accumulated and Withdrawal Rate would obviously play a role. @dunno I’m sure could produce the the data to prove / disprove.

I do think though that once a certain level of wealth is achieved relative to spending and likely lifespan 100% equities is not needed even taking into account a nasty bout of inflation. In my case I love equities. Given anything’s possible maybe one day I’ll live to regret it like the example below taken from the previous link:

 

Inflation is obviously less of a concern now than it would have been 20 years ago when many of the studies were done.

As for the ‘safest’ allocation when you have already achieved enough and wish to preserve it, who can be sure?

Being the obsessive type I have done numerous Monte Carlo simulations with fun tools at Portfolio Visualiser.

The best results (albeit via back-tested analysis) are from a 50-60 government bond allocation, with aggressive equity (large cap/small cap value) kind of thing.

Of course, this is US and back-testing.

How strategies such as yours using franked dividends compare cannot be plugged into my calculator.

At the moment, we’re hedging our bets.

We have a big bucket of Oz shares for dividends and some growth.

And a big bucket of international shares and bonds in a somewhat less than age appropriate split.

 

Which Bond fund(s) do you use for International?

 

I used to just use the wholesale equivalent of VAF, but when I had to start again recently due to a change of structure I switched to a 50/50 split using Pimco Australian and global hedged.

The reason for the switch is that much research shows that long-term bond returns revert to the underlying yield.

Index funds let the capital growth ride, meaning it disappears over time.

Pimco and their ilk tend to capture the growth and pay it out as dividends.

So short term they have lower capital growth and higher dividends.

Longer term they have similar capital growth (ie not much) but have still paid the higher dividends.

At least that’s the theory.

 

Not buying the pretext of the link.

Seriously the basis for the article is a concentration in large cap tech in 2000. Those poor soles only having 3M in the Nasdaq at the bottom in 2003. ….If they weren’t anchored to the 13M number everything would be fine.

Glass half empty. I used to have 13Mil (neglecting that was based on mark to market at high valuation multiples)

Glass half full. I have 3Mil invested at low valuation multiples – what a setup for the future, how lucky I am to be in this position.



I think stories like referenced are designed to play on psychology and understanding(or lack of it) but still, if they disquiet you it might be a sign to sit in a dark room all alone and truthfully ask yourself how much volatility you are prepared to wear, the answer is influenced by knowledge, risk appetite, ego, wealth, circumstances, objectives……… It’s a different answer for everybody.

Personally, I’m happy as a 100% equity allocator to read stories about 3Mil of equity accumulation at market lows all day long. Mind you I wouldn’t be game to have a 100% portfolio all on the NASDAQ.

 

He he pretty obvious stuff. But I thought the Bond guys needed a boost.

But ya gotta take into account the senility / geriatric effect. Based on my mental state / memory lately I shudder to think what I might do at that age.

 

Why Bother With Bonds?

The first reason why owning some bonds is always important is because stocks are very risky. If we pay any attention to the news, then we know they are volatile. A good rule of thumb is that they could lose 50% of their value in any year. That year could be this year, or the first year after you retire—so they are risky in the short-term and the long-term as well.

Over the past two centuries, stocks have returned 7% per year above inflation—or a real return twice that of bonds. [1]

But doesn’t this chart just beg our very question: Why Bother With Bonds? One important time is: when you can be hurt by short-term volatility. The ratio of stocks to bonds is the most important lever you have to control your overall investment risk.

Bonds are risky too. Later we’ll see that bond values move opposite interest rates and sometimes don’t keep up with inflation. But keep this in perspective! They are an order of magnitude less volatile than stocks and we’ll learn how these risks can be managed.

Now it’s time for some fun. It’s simple. I’ll give you two facts. You choose the fact that is true. Here’s the first one: The longer you own stocks, the safer they become. The second one is: The longer you own bonds, the safer they become. It’s your turn now. Click on the one that is true.

( 10 SECOND COUNTDOWN )

  If we use volatility to measure safety, then this one is false. Stocks remain volatile every day of every year, including the day before you sell them 40 years from now. But this is an easy mistake to make because we often hear that “stocks held for decades rarely lose money”. That’s true too, but not losing the amount you originally invested becomes less important than not losing the value it grows to become—and that you come to rely on.

This is correct. These two choices get at a major difference. While buying stocks are buying ownership in companies—something you can keep forever; buying a bond is really just loaning your money for a specific period of time. The longer you own the bond, the closer you get to the maturity date, at which time you’ll get back the full value that you invested. The highest quality bonds are very safe with no surprises.

Later on we’ll look at CDs, bond funds, and other ways to own bonds that have some differences to be aware of. But next, we’ll look at how bonds can provide welcome ballast to stabilize your portfolio in a bad year.

 

If you have a 3% withdrawal rate or less, or you are currently bringing in more than you are spending, you're probably not fazed by Mr Markets moods, I probably wouldn't be either

At this stage, when Mr Market gives me smack of 5% or more I feel it

 

Guess so but as with a lot of things the starting point is how much you have. Someone with $350k compared to another with $3.5m. The first is probably going to be weeping and wailing for eternity while the other could merely be crying into their Weeties on a Monday morning.

 

Given the events of this week, I am certainly very glad I have a hefty portion of my portfolio in government bonds and (aside from the Oz income portion) the rest very well diversified. Especially since I lump summed in less than a year ago.

3.5% down in a week is a lot more palatable than 10% down.

 

Between bonds, a large undeployed pile of cash and private equity (yes, I’m cheating) we are down about 1.5% from all time high water mark

 

Lucky timing of circumstances?
**** Poor application of Asset Allocation?
or closet market timer?

I'm down what ever the market is down ~ 10% odd

On an absolute basis people don't normally feel good about being down 1.5% or 3.5% ...… Be grateful that I'm taking it in the neck so all you bond and cash holders can feel relatively better.

 

Has your advisor suggested bringing forward future purchases from your truckload of cash whilst the market is a little unsteady?