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Sunday, June 06, 2010

John Bogle on Long, Government & Corporate Bonds

Summary of John Bogles advice given during a video interview on bond allocation to Long, Government and Corporate Bonds.

In this video interview John (Jack) Bogle, the founder and former chairman of Vanguard, gives his current recommends for bond investors. Many will be surprised to learn Bogle is recommending against holding certain types of bonds and a different bond allocation than what is in Vanguard's Total Bond Index Fund, VBMFX.

For most of his career, Bogle has recommended against market timing in favor of placing your assets into index funds with an allocation based on your age. Generally, he recommended 100 percent less your age into Vanguard's Total Stock Market index fund, VTSMX, with the remainder of the funds in Vanguard's Total Bond Index Fund as he said in a CNBC interview.
Get your balance right. Have a certain amount in bond funds, bond index funds or Pimco funds for that matter because Paul (McCulley, PICMCO managing director) has done a fabulous job out there. Paul and Bill (Gross, PIMCO Founder and director). Take your equity position and make it 80% say US, 20% non US. Get your balance having something to do with your age. More bonds as you get older like I am and stay the course.
[John C. Bogle (7/14/08 with DJIA in a bear market at 11,100)]

This has changed which the video below and my summary of the interview highlight.

Some Key points from the interview:

#1 Bogle says avoid the long maturities:
I am nervous about the fixed income markets. Therefore I would not use the long maturities.
#2 Bogle recommends about 1/2 short term bonds and 1/2 in intermediate term to get some "reasonable income" and the ability to "ride the fluctuations that are sure to come."
And so, I'd say some combination of maybe one half short term bonds, or limited term, a little longer than short term, or in intermediate terms. In other words, half in short and limited, and half in intermediate term, which should give you some reasonable income, and should enable you to ride with these fluctuations that are sure to come, I think, in the bond market.

Full Text of Bogle Interview.

#3 On the total bond index fund, VBMFX, Bogle recommends a different weighting with more in corporate and less in government bonds than the index shows.
So you really ought to look into what kind of a bond fund you have. The index has sort of an intermediate term of maturity, and that's certainly more than satisfactory. But it's heavily weighted by government, and at these yield relationships, I'd think I'd have a little more in corporates, and maybe a little less in governments, than the index shows.

Some will say the above is market timing which Bogle has been a strong opponent against.
The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible. After nearly fifty years in this business, I do not know of anybody who has done it successfully and consistently. I don't even know anybody who knows anybody who has done it successfully and consistently. Yet market timing appears to be increasingly embraced by mutual fund investors and the professional managers of fund portfolios alike.
[John C. Bogle in Common Sense on Mutual Funds: , pg 20]

My answer is Bogle has recommended against market timing the stock market in general but he's always said it is ok to use some of your "mad money" or "explore portfolio" to gamble on the edges. Bogle on Managed Mutual Funds:
Actively managed mutual funds? Yes. But only if they are run by managers who own their own firms, who follow distinctive philosophies, and who invest for the long term, without benchmark hugging. (Don't be disappointed if the managed fund loses to the index fund in at least one year of every three!)"
[John C. Bogle in “The Little Book of Common Sense Investing”, Chapter 18]

Bogle on individual stocks for your “Funny Money” account:
Yes, Pick a few. Listen to the promoters. Listen to your broker or adviser. Listen to your neighbors. Heck, even listen to your brother-in-law.
[John C. Bogle in “The Little Book of Common Sense Investing”, pg 202]

Also, removing  long term  and some government bonds from your portfolio and replacing them with corporate bonds doesn't change your allocation between fixed and equities so you could argue he isn't market timing stock, just bonds!

I agree with Bogle's advice and neither of my newsletter portfolios currently have bonds with long maturities.  Kirk's Two Investment Letters

With my own money and the core portfolios in "Kirk Lindstrom's Investment Letter," I don't need the yield so I am in capital preservation mode on the fixed income side with my only bonds holdings in  iBonds, TIPS and TIPS index funds such as FINPX from Fidelity and VIPSX from Vanguard.

Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 158% (a double plus another 58%!!) vs. the S&P500 UP a tiny 4.5% vs. NASDAQ UP a tiny 1.2% (All through 6/5/10)

In 2009, "Kirk's Newsletter Explore Portfolio" gained 33.5% vs. the DJIA up 18.8%
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What do people think about John Bogle's advice to not own certain bonds and have a different bond allocation than is currently in the total bond fund?   


1 comment:

  1. "What do people think about John Bogle's advice to not own certain bonds and have a different bond allocation than is currently in the total bond fund? "

    Call it market timing if you wish but I have to admit I am pleased that Bogle has gone public endorsing advice quite similar to what I've written about and recommend in my two newsletters and on the free blogs.

    My advice, especially that given in "Kirk Lindstrom's Investment Letter" differs from Bogles because I have no incentive to tell my readers to keep their short term fixed income money at Vanguard. I currently have ALL the fixed income part of my core portfolios outside of Vanguard where I can get higher yield (than money funds) with zero interest rate risk. I pay a small penalty in yield but I sleep much better at night. I own TIPS in the portfolio, but I bought them directly to avoid all management fees and the ability to hold to maturity without dilution of returns with new money coming into TIPS funds if inflation returns.


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