Jack Bogle – On Bond Split

Jack Bogle – On Bond Split

The following encloses what Jack Bogle says about why he prefers Intermediate Bond to Total Bond and why it might be a good idea to have both, in equal proportions, in the future, though for most it would be simpler to have one or the other. This mainly serves as a note to myself as to why I want 50/50 Total Bond / Intermediate Bond (BND / BIV) in my tax deferred and a similar split with Munipal Bond funds (VWAHX/VWITX/VWSTX) in my taxable. You can read for yourself what Jack Bogle actually says, the following was copied from his site:

Dear Jack:

I am in the process of reading your new book”The Little Book”and in your chapter on bond funds,you state that “the intermediate-term bond index fund is a truly superior performer”.

I owned that fund along with the Long Term Bond Index Fund.Then last year Vanguard developed a financial plan for me in which they recommended that I sell those two funds and purchase the Total Bond Market Index Fund.I did just that and now I am concerned that I made a mistake and should have at least kept the Intermediate fund. I realize you are comparing that fund to Muni Bonds and Gov’t Bonds but I am wondering how you feel about the Total Bond Market Index Fund vs.Intermediate. Would it make sense to hold both? I also own the European Index Fund and it has done very well and I am considering buying the Total International Stock Index Fund and also keeping the European Fund. Again,does it make sense to hold both? Does it ever make sense to hold a part of a total index fund and still hold the total fund.

As you can see I am confused so anything you can do to shed some light on all of this would REALLY be appreciated.

I look forward to hearing from you,
John D

Hi, John,

Thanks for asking about our bond funds. I like the (taxable) IT bond index fund because it provides more stability than the LT index fund, and more income than the ST index fund.  The Total Bond Market Index Fund is fine, but I vaguely wonder about a bond fund that has 35% of its portfolio in non-bonds (i.e., GNMA securities, with their risk of being prepaid early,  when interest rates tumble).

That said, TBMF happens to have a maturity profile that is intermediate-term on balance, and so differs from IT largely in its holdings of GMNAs and Treasurys. Their ten-year records are similar, based on the tabulation I’m sending separately (IT 6.49%, TBM 5.96%, which included a single year–2002–in which we sort of forgot to stick to index principles, costing 2.00%, or about 0.20% per year.  I’m assured by management that such an aberration will not recur.)

As it happens your previous 50LT/50IT strategy was a winning one, as the tabulation shows.  Of course we have no idea which of the above strategies will work best in the coming ten years, but it’s comforting to realize that the results of all six of those shown are almost certain to differ only in degree.

There’s no particular reason NOT to hold two overlapping index funds.  In your case, adding a similar investment in Total International to your present European would simply lower your European exposure from 100% to about 80% of your Intl holdings.  Not much difference, for Eur is about 60% of Intl.

I don’t know nearly enough about your assets and goals to advise you, but I hope this note helps clarify the issues.  Perhaps your Vanguard adviser can explain the reasoning behind your allocations, and discuss possible changes.

Jack Bogle

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