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Tuesday, April 27, 2010

Bond allocation

Looking for a specific recommendation for allocating the bond portion of your portfolio? Reasoning at bond allocation.

I think this is a reasonable allocation. I would argue for 5% in TLT for some long Treasury rate exposure and a reduction in "Money Market" of 5% to a 15% exposure.

He is playing it pretty tight with the attempt to catch a bit more from the high yield sector. He sees another possible 100 basis points tightening. If it gets another 50 basis points, I would take it and run. High yield has had a spectacular run.

Vanguard Inflation-Protected Securities Fund (VIPSX): 30%

Vanguard Total Bond Market Index Fund (VBMFX) (holds government and corporate investment grade bonds): 20% *

Vanguard High-Yield Corporate ((VWEHX)): 20%

Vanguard Intermediate-Term Investment-Grade (corporate) (VFICX): 10% * Vanguard Money Market (really really short term bonds): 20%

* more sensitive to interest rates.


  1. A Vanguard Prime Money Market yield of .02% doesn't exactly have me turning cartwheels when you can get somewhere between 1.3-1.2% FDIC insured money market or savings account at Discover, Amex, or Ally. I've been in Prime Money Market for many years and have recently switched.

    Also, I expect interest rates to rise sometime after the elections this fall so I'm keeping my maturities short. I like the Vanguard Intermediate and Short-term Investment Grade Bond Funds. I'd also recommend buying the Treasury allocation through and avoid paying the mutual fund fees.

  2. Good point on the Discover money market as long as you stay within FDIC limit. It is a little bit of a hassel if you are moving your money around. For example, if you want to reduce cash position by 5% and increase corporate bond exposure by 5%. But the yield pickup is substantive.
    Same point on Treasury Direct - not easy to sell and put into alternative asset. Still, you do get a nice saving from transactions costs.
    I expect interest rates to rise as well but we should recognize that we are market timing here. That's why I like to have a big toe at least in the long part of the curve. If the deflation scenario plays out it would be a shocker I think to just about everybody and as we know "Mr. Market" likes to fool everybody!
    Final point - I see many people with numerous statements from a number of brokers so I tend to preach simplification. For most people having less statements by combining accounts and reducing the number of brokers allows them to get their investment positioning cleared up.

  3. I agree with you on simplification. It makes it much easier to stick with the investment plan. And who hasn't been fooled by "Mr. Market?"