How to be sure a bond fund is hedged

hewhohuntselves

JohnWinder said:

So for example a combination of Vanguard FTSE All World UCITS ETF and Vanguard Global Bond Index fund together could work ok?

It’s hard to imagine how they wouldn’t be a good choice. Something different might turn out to give better returns and/or less risk, and one could tweak it here or there in the fussy pursuit of the current image of perfection, but from all we know it’s a well justified choice. Ken French knows a bit about finance, has a Nobel prize for it and a voice that sounds like he’s a clear thinker endorses your approach. Question: ‘are there any cases where it would make sense for someone to pursue an actively managed strategy? Answer: ‘Not that I'm aware of.’ https://rationalreminder.ca/podcast/100. 

I suspect there is a cheap single fund out there that would do the work - rebalancing - associated with this arrangement for you.

What about Fidelity Multi Asset Allocator or Vanguard Lifestrategy?  They come in different equity/bond splits.

Pat38493

hewhohuntselves said:

JohnWinder said:

So for example a combination of Vanguard FTSE All World UCITS ETF and Vanguard Global Bond Index fund together could work ok?

It’s hard to imagine how they wouldn’t be a good choice. Something different might turn out to give better returns and/or less risk, and one could tweak it here or there in the fussy pursuit of the current image of perfection, but from all we know it’s a well justified choice. Ken French knows a bit about finance, has a Nobel prize for it and a voice that sounds like he’s a clear thinker endorses your approach. Question: ‘are there any cases where it would make sense for someone to pursue an actively managed strategy? Answer: ‘Not that I'm aware of.’ https://rationalreminder.ca/podcast/100. 

I suspect there is a cheap single fund out there that would do the work - rebalancing - associated with this arrangement for you.

What about Fidelity Multi Asset Allocator or Vanguard Lifestrategy?  They come in different equity/bond splits.

Yes this is certainly another option.

There seems to be a view out there that if you do this yourself you will be slightly better off (as long as you do it properly).  However, I’m not sure how much difference it will really make.

hewhohuntselves

Pat38493 said:

hewhohuntselves said:

JohnWinder said:

So for example a combination of Vanguard FTSE All World UCITS ETF and Vanguard Global Bond Index fund together could work ok?

It’s hard to imagine how they wouldn’t be a good choice. Something different might turn out to give better returns and/or less risk, and one could tweak it here or there in the fussy pursuit of the current image of perfection, but from all we know it’s a well justified choice. Ken French knows a bit about finance, has a Nobel prize for it and a voice that sounds like he’s a clear thinker endorses your approach. Question: ‘are there any cases where it would make sense for someone to pursue an actively managed strategy? Answer: ‘Not that I'm aware of.’ https://rationalreminder.ca/podcast/100. 

I suspect there is a cheap single fund out there that would do the work - rebalancing - associated with this arrangement for you.

What about Fidelity Multi Asset Allocator or Vanguard Lifestrategy?  They come in different equity/bond splits.

Yes this is certainly another option.

There seems to be a view out there that if you do this yourself you will be slightly better off (as long as you do it properly).  However, I’m not sure how much difference it will really make.

I think it will be very marginal. 

Pat38493

hewhohuntselves said:

Pat38493 said:

hewhohuntselves said:

JohnWinder said:

So for example a combination of Vanguard FTSE All World UCITS ETF and Vanguard Global Bond Index fund together could work ok?

It’s hard to imagine how they wouldn’t be a good choice. Something different might turn out to give better returns and/or less risk, and one could tweak it here or there in the fussy pursuit of the current image of perfection, but from all we know it’s a well justified choice. Ken French knows a bit about finance, has a Nobel prize for it and a voice that sounds like he’s a clear thinker endorses your approach. Question: ‘are there any cases where it would make sense for someone to pursue an actively managed strategy? Answer: ‘Not that I'm aware of.’ https://rationalreminder.ca/podcast/100. 

I suspect there is a cheap single fund out there that would do the work - rebalancing - associated with this arrangement for you.

What about Fidelity Multi Asset Allocator or Vanguard Lifestrategy?  They come in different equity/bond splits.

Yes this is certainly another option.

There seems to be a view out there that if you do this yourself you will be slightly better off (as long as you do it properly).  However, I’m not sure how much difference it will really make.

I think it will be very marginal. 

That’s my impression as well - in fact when I run simulations in tools like Timeline, I can’t really even find any significant benefit from having a cash bucket of 2 years which seems to be the standard recommendation for pension spend planning - when I mess about with this type of approach and try multiple rebalancing or withdrawal order strategies, it doesn’t hardly make any difference.  

The only thing which does make a difference is going too heavy in cash or bonds - if I put my % above about 30, my success rate starts to tank pretty quickly.  All the other stuff just makes a 1% difference here or there.

dunstonh

Pat38493 said:

hewhohuntselves said:

Pat38493 said:

hewhohuntselves said:

JohnWinder said:

So for example a combination of Vanguard FTSE All World UCITS ETF and Vanguard Global Bond Index fund together could work ok?

It’s hard to imagine how they wouldn’t be a good choice. Something different might turn out to give better returns and/or less risk, and one could tweak it here or there in the fussy pursuit of the current image of perfection, but from all we know it’s a well justified choice. Ken French knows a bit about finance, has a Nobel prize for it and a voice that sounds like he’s a clear thinker endorses your approach. Question: ‘are there any cases where it would make sense for someone to pursue an actively managed strategy? Answer: ‘Not that I'm aware of.’ https://rationalreminder.ca/podcast/100. 

I suspect there is a cheap single fund out there that would do the work - rebalancing - associated with this arrangement for you.

What about Fidelity Multi Asset Allocator or Vanguard Lifestrategy?  They come in different equity/bond splits.

Yes this is certainly another option.

There seems to be a view out there that if you do this yourself you will be slightly better off (as long as you do it properly).  However, I’m not sure how much difference it will really make.

I think it will be very marginal. 

That’s my impression as well - in fact when I run simulations in tools like Timeline, I can’t really even find any significant benefit from having a cash bucket of 2 years which seems to be the standard recommendation for pension spend planning - when I mess about with this type of approach and try multiple rebalancing or withdrawal order strategies, it doesn’t hardly make any difference.  

The only thing which does make a difference is going too heavy in cash or bonds - if I put my % above about 30, my success rate starts to tank pretty quickly.  All the other stuff just makes a 1% difference here or there.

I don't think timeline can model that into the equation as it assumes that you will always be holding that amount of cash.   So, on their modelling you wouldnt be draining the cash bucket during negative periods but in real life you would. 

Also, bucketing works best if you factor in long term and medium term buckets.  The long term bucket would typically have less fixed interest/cash than medium or short term.  So, on a risk scale, the long bucket would  be a bit higher up the scale and that would be fine as the cash at the lower end is offsetting that extra risk.

Pat38493

dunstonh said:

Pat38493 said:

hewhohuntselves said:

Pat38493 said:

hewhohuntselves said:

JohnWinder said:

So for example a combination of Vanguard FTSE All World UCITS ETF and Vanguard Global Bond Index fund together could work ok?

It’s hard to imagine how they wouldn’t be a good choice. Something different might turn out to give better returns and/or less risk, and one could tweak it here or there in the fussy pursuit of the current image of perfection, but from all we know it’s a well justified choice. Ken French knows a bit about finance, has a Nobel prize for it and a voice that sounds like he’s a clear thinker endorses your approach. Question: ‘are there any cases where it would make sense for someone to pursue an actively managed strategy? Answer: ‘Not that I'm aware of.’ https://rationalreminder.ca/podcast/100. 

I suspect there is a cheap single fund out there that would do the work - rebalancing - associated with this arrangement for you.

What about Fidelity Multi Asset Allocator or Vanguard Lifestrategy?  They come in different equity/bond splits.

Yes this is certainly another option.

There seems to be a view out there that if you do this yourself you will be slightly better off (as long as you do it properly).  However, I’m not sure how much difference it will really make.

I think it will be very marginal. 

That’s my impression as well - in fact when I run simulations in tools like Timeline, I can’t really even find any significant benefit from having a cash bucket of 2 years which seems to be the standard recommendation for pension spend planning - when I mess about with this type of approach and try multiple rebalancing or withdrawal order strategies, it doesn’t hardly make any difference.  

The only thing which does make a difference is going too heavy in cash or bonds - if I put my % above about 30, my success rate starts to tank pretty quickly.  All the other stuff just makes a 1% difference here or there.

I don't think timeline can model that into the equation as it assumes that you will always be holding that amount of cash.   So, on their modelling you wouldnt be draining the cash bucket during negative periods but in real life you would. 

Also, bucketing works best if you factor in long term and medium term buckets.  The long term bucket would typically have less fixed interest/cash than medium or short term.  So, on a risk scale, the long bucket would  be a bit higher up the scale and that would be fine as the cash at the lower end is offsetting that extra risk.

OK but then how do you decide when to draw only from cash?  I would guess that if you are rebalancing the portfolio, this would happen to some extent anyway, but if you are going to take an active decision to only draw from cash “when markets are down”, how do you set the criteria for that, and more importantly how do you set the criteria for when to start topping up your cash bucket again?

dunstonh

OK but then how do you decide when to draw only from cash?

You would always be drawing from the cash.   However, it is a judgement call when to replenish the case through sale of units.

 For example, during 2022 when values were falling, you wouldn't be replenishing that cash through sales of units.  It would just be div/int distributions from the inc units going in.

In normal periods with minor movements, you wouldn't be concerned but during larger negative periods, you would hold back selling units.

JohnWinder

For example, during 2022 when values were falling, you wouldn't be replenishing that cash through sales of units.  It would just be div/int distributions from the inc units going in.

Indeed it could well be if that’s how you set it up, but folk argue that it doesn’t matter whether you take dividends as cash or sell the shares for cash, your non-cash portfolio suffers the same loss. A business’ value is a function of its assets and projected future earnings; if it pays 3% as a dividend its value drops 3% (and you hold the same percentage of a company now worth 3% less). If it issues no dividend or you reinvest the dividend, and sell 3% of your holding, the company value didn’t change because of the dividend, but you hold 3% less of the company. Same same.

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=406429&newpost=7320329

JohnWinder

 how do you set the criteria for that, and more importantly how do you set the criteria for when to start topping up your cash bucket again?

A wide range of options have been proposed: from 20 years spending as cash, topped every 2 years, to no cash held. People have tested the approaches against historical returns, and some work better than others at different times. You’ll never know which will be best as it depends on an arrangement that perfectly aligns with the sequence and size of future returns. There have been books written on it: Living of you money, by McClung, and earlyretirementnow.com has a whole series of posts on it.

dunstonh

Indeed it could well be if that’s how you set it up, but folk argue that it doesn’t matter whether you take dividends as cash or sell the shares for cash, your non-cash portfolio suffers the same loss.

it does matter as a portfolio with a higher yielding ratio will extend the life of cash float whereas a portfolio with a lower yielding ratio will require the sales of units earlier.