Stocks — Part XII: Bonds

Well. Here we are in Part XII of our series on Stocks. And the subject is bonds. What’s up with that??

When I first began this series the plan was for maybe four or five segments. Sure enough, those focused on stocks. But then we looked at some portfolio ideas and some other stuff, like bonds, got added to the mix. Next thing you know we looking at different kinds of investment buckets, the prospect of Vanguard getting nuked and asking if everyone can retire a millionaire

So now adding bonds to the mix seems not such a stretch. They are, in a sense, the more steady and reliable cousins to stocks. Or so it seems. But as we’ll see, bonds are not as risk free as many believe.

In any event, since we have included Vanguard’s Total Bond Market Fund, VBTLX, to the Wealth Preservation and Building Portfolio we should take a little closer look at the things.

The challenge is the subject of bonds is a BIG topic. Most of the details are unlikely to be of interest to the readers of this blog on simple investing. Heck, they’re not all that interesting to me. Yet, unless you are comfortable just taking my word for it, you might want to know just what these things are and why they’ve found their way into our portfolio.

But how much info is enough? Beats me. So here’s what we’ll do. In this post I’ll talk about bonds in Stages. Once you’ve read enough to be comfortable owning the things (or not) you can just stop reading. If you get to the end, the point where I’m too bored to write more, still hungry—google is your friend.

Info Stage I

Bonds are in our portfolio to provide a deflation hedge. Deflation is one of the two big macro risks to your money. Inflation is the other.

Bonds also tend to be less volatile than stocks and they serve to make our investment road a bit smoother. Plus they earn interest.

Info Stage II

So what are bonds anyway, and how do they differ from stocks?

In the simplest terms: When you buy stock you are buying a part ownership in a company. When you buy bonds you are loaning money to a company, or to the government.

Since deflation is when the price of stuff falls, when you get paid back the money you’ve lent has more purchasing power. Your money buys more stuff than when you lent it. This increase in value helps to offset the losses deflation will bring to your other assets.

In times of inflation prices rise, so money owed to you loses value. When you get paid back your cash buys less stuff. Better then to own assets that rise with inflation.

We’ll only see this sharp rise in the one and fall in the other in times of rapid inflation or deflation. Both of which are bad times. In the more normal times of modest inflation our bonds and REITS will still serve us well. Bonds will pay their interest and REITs their dividends.

Info Stage III

Since we own our bonds in VBTLX, a broad-based bond index fund, most of the risks in owning individual bonds go away. The fund holds 5248 bonds, all investment grade and none rated lower than Bbb (see Stage IV). This reduces default risk. The fund holds bonds of wildly differing maturity dates, mitigating the interest rate risk. The fund holds bonds across a broad range of terms, reducing inflation risk.

In the next Stages we’ll talk more about these risks, but what’s important to understand at this point is: If you are going to hold bonds, holding them in a fund is the way to go. Very, very few individual investors opt to buy individual bonds. US treasuries and bank CDs being the exceptions.

Info Stage IV

The two key elements of bonds are the interest rate and the term. The interest rate is simply what the bond issuer (the borrower) has agreed to pay the bond buyer (the lender: you). The term is simply for how long the money is being lent. So, if you were to buy a $10,000 bond at a 10% interest rate with a 10 year term from XYZ company, each year XYZ would pay you $1,000 interest (10% of 10k) and at the end of 10 years they would repay the full $10,000. If you hold the bond until the end of the 10 years, or to the Maturity Date, the only thing you have to worry about is the possibility of XYZ defaulting.

So, default is the first risk associated with bonds. To help investors evaluate the risk in any company or government bond, various rating agencies evaluate their credit worthiness. They use a scale ranging from AAA on down to D, kinda like high school. The lower the rating the higher the risk. The higher the risk the harder it is to find people to buy your bonds. The harder it is to find people to buy your bonds the more interest you have to pay to attract them. Investors expect to be paid more interest when they shoulder more risk.

So, default risk is also the first factor determining how much your bond will pay you. As a buyer of bonds, the more risk you are willing to accept the higher the interest you’ll receive.

Info Stage V

Interest Rate Risk is the second risk factor associated with bonds and it is tied to the term of the bond. This risk only comes into play if you decide to sell your bond before the maturity date at the end of the term. Here’s why:

When you decide to sell your bond you offer it to buyers on what is called the “secondary market.” Using our example above these buyers might offer more than the 10k you paid, or less. It depends on how interest rates have changed since your purchase. If rates have gone up, the value of your bond will have gone down. If rates have gone down, the value of your bond will have risen. Confusing, no? Look at it this way:

You decide to sell your bond from our example above. You paid $10,000 and are earning 10%/$1,000 per year. Now, let’s say interest rates have risen to 15% and I have $10,000 to invest. Since I can buy a bond that will pay me $1500 per year, clearly I’m not going to be willing to pay you $10,000 for your bond that only pays $1,000. Nobody would, and you’d be stuck. Fortunately, however, the secondary bond market will calculate exactly what lower price your bond is worth based on the current 15% interest rate. You might not like the price, but at least you’ll be able to sell.

But if interest rates drop, the roles reverse. If instead of 10% they fall to 5%, my $10,000 will only buy me a bond paying $500 per year. Since yours pays $1,000, clearly it is worth more than the $10,000 you paid. Again, should you wish to sell, the bond market will calculate exactly what your higher price will be.

When interest rates rise, bond prices fall. When interest rates fall, bond prices rise. In either case, if you hold a bond to the end of its term you will, barring default, get exactly what you paid for it.

Info Stage VI

As you’ve likely guessed, the length of the term of a bond is our third risk factor and it also helps determine the interest rate paid. The longer the term of a bond the more likely interest rates will change significantly before it matures and that means greater risk. While each bond is priced individually, there are three bond term groupings: Short, medium and long. Looking at US Treasury Securities for example we have:

Bills: Short-term bonds of 1-5 year terms.

Notes: Mid-term bonds of 6-12 year terms.

Bonds: Long-term bonds of 12+ year terms.

Generally speaking, short-term bonds pay less interest as they are seen as having less risk since your money is tied up for a shorter period of time. Accordingly long-term bonds are seen as having higher risk and pay more. If you are a bond analyst type, you’ll graph this on a chart and create what is called a Yield Curve. The greater the difference between short, mid and long-term rates, the steeper the curve. This difference varies and sometimes things get so wacky short-term rates become higher than long-term rates. The chart for this event produces the wonderfully named Inverted Yield Curve and it sets the hearts of bond analysts all a flutter.

Info Stage VII

Inflation is the biggest risk to your bonds. Inflation is when the cost of goods is rising. When you lend your money by buying bonds, during periods of inflation when you get it back it will buy less stuff. Your money is worth less. A big factor in determining the interest rate paid on a bond is the anticipated inflation rate. Since some inflation is almost always present in a healthy economy, long-term bonds are sure to be affected. That’s a key reason they typically pay more interest. So, when we get an Inverted Yield Curve and short rates are higher than long rates, investors are anticipating low inflation or even deflation.

Info Stage VIII

If you’ve read this far, I have a secret to share and a confession to make. I no longer hold my personal bond allocation in VBTLX. For now, I’m using VFIDX*. This is Vanguard’s Intermediate-Term Investment Grade Bond fund.

This change is buried here because it doesn’t fit with the basic concept of the Simple Path; namely an investment strategy that can be set and left to run with minimal attention. Meeting that parameter is best served with VBTLX and its coverage of the entire bond market. That’s still the recommendation I stand by for the Simple Path portfolios, and I’ll personally be returning to it in the future.**

But if you have a more active investing inclination, as I do, you might want to consider VFIDX for the time being. Here’s my thinking:

  • A few short years ago we were teetering on the brink of a deflationary depression like that of the 1930s. Very scary stuff.
  • The antidote is a nice solid bit of inflation.
  • This is exactly what the Fed is trying hard to spark.
  • The Fed has been aggressively pumping money into the system and has taken short term rates to zero. Historic lows.
  • Surprisingly inflation has remained low, but that is sure to change. (Update: 9/26/2023… Yep, things changed.)
  • Likely fast and hard.

In this environment short-term bonds are paying next to nothing. Long-term bonds will get hit hard when inflation reignites. Intermediate bonds pay a decent interest rate and their term makes them less vulnerable than long bonds to inflation. It’s like Goldilocks and the Three Bears. Papa’s bed is too big. Baby’s bed too small. But Mama’s medium term bond bed is just right. For now, I’m hangin’ with Mama.

*As of April, 2017 I have switched from VFIDX to VICSX. Because I make random changes like this seeking a slight advantage, for most readers I suggest VBTLX which you can just hold forever.

**As of December, 2017 I have returned to VBTLX

Info Stage IX

Here are a few other risks:

Credit downgrades. Remember those rating agencies we discussed above? Maybe you bought a bond from a company rated AAA. This is the risk that sometime after you buy the company gets in trouble and its rating is downgraded. The value of your bond goes down with it.

Callable bonds. Some bonds are “callable,” meaning that the bond issuer can pay them off before the maturity date. They give you your money back and stop paying interest. Of course they would only do this when interest rates are falling and they can borrow money more cheaply. As you now know, when rates fall the value of your bond goes up. But if it gets called, poof! There goes your nice gain.

Liquidity risk. Some companies are just not all that popular and that goes for their bonds. Liquidity risk refers to the possibility that when you want to sell few buyers will be interested. Few buyers = lower prices.

All of these risks are nicely mitigated simply by owning a broad-based bond index fund.

Info Stage X: Municipal Bonds

Municipal Bonds are bonds issued by local governments and government agencies at the state level or below, typically to fund public works projects like schools, airports and the like.

While offering lower interest rates than corporate bonds, they have the advantage of being exempt from the federal income tax and, often for the state in which they are issued, state income taxes. This makes them appealing to folks in high income tax brackets, especially if they live in a high income tax state. It also makes them less expensive in interest payments for the governments that issue them.

It is sometimes suggested that Muni bond rates are set so low that the tax advantage is actually negated. That is, after paying taxes corporate bonds are competitive. This, of course, depends on your tax bracket and the state in which you live. Those in places like California and New York that have high state income taxes will see more benefit than those like me who live in New Hampshire where there is no state income tax.

Vanguard has several funds devoted to munis, including several focused on specific states. Anyone interested can check them out here.

Info Stage XI

There are precisely a gazillion different types of bonds. Basically they come from national governments, state and local governments, government agencies and companies. Term length, interest rates and payment terms are limited only by the imagination of the buyers, sellers and regulators. Further….

…and here’s where my interest in writing about these things drifts away. ~2200 words is enough. Nothing further matters for us index fund bond investors. But if you just have to know more, Google is your friend. Be sure to report your findings in the comments.

Addendum 1: What would the bursting of the bond bubble look like? Not so bad, as it turns out.

Addendum 2: Selecting your asset allocation

Addendum 3: Return to VBTLX

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Important Resources

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  • NewRetirement offers cool tools to help guide you in answering the question: Do I have enough money to retire? And getting started is free. Sign up and you will be offered two paths into their retirement planner. I was also on their podcast and you can check that out here:Video version, Podcast version.
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  1. Mr. Risky Startup says

    Don’t want to waste much of your time, but if it is raining and you cannot ride your motorcycle, and you are bored, can you please take a quick peek at the Vanguard Canada products?

    Mainly, I (and many of your Canadian readers I am sure) am interested in your opinion considering relatively low amount of assets and small number of holdings (with exception of US index one). For example, Canada Index ETF only has 100 or so stocks, and at times, certain stocks represented huge chunks of Index (for example, Nortel at one point represented 36% of the entire Toronto Stock Exchange, and most recently, RIM of course – and both had incredible drops).

    Also, I am still trying to figure effect currency exchange is going to play when buying Vanguard US Index funds (what do they mean by CAD$ hedged?)??? For example, I could buy Vanguard ETF’s in US dollars and through US stock exchange (via Questrade), and I could also buy them in Canada from my tax-free savings accounts or my RRSP account. I am just not sure what is better option, assuming that Canadian dollar is at historical heights and only has one way to go (down). I am assuming that it is better to buy in US funds but I am not certain (I am VERY green when it comes to investing).

    • hockeyball1079 says

      I second this post by Mr. RS. I am another green Canadian trying to figure out my investing plans outside of Canada. I’m excited for Vanguard Canada’s new ETF’s to launch in December and having a mind like yours take a peak at them and translate into your writing style would be greatly appreciated eh.

    • jlcollinsnh says

      Hi Mr. RB and Mr. HB…

      Well, it is a rainy day today….

      Just took a quick look. VUS – is (as a total US stock market index fund) a match for VTSAX, with an interesting twist and a bit higher expense ratio.

      They are operating this fund using, to quote from the description “derivative instruments to seek to hedge the U.S. dollar exposure of the securities included in the MSCI U.S. Broad Market Index back to the Canadian dollar.” All that means is operating the fund with the goal of mitigating the currency risk inherent as the Canadian and US dollars fluctuate in value relative to each other. This is probably why the expense ratio is a bit higher.

      If you were to buy VTI – – (the US ETF) your investment would be in US dollars. When it comes time to sell and convert back to Canadian dollars your return will be effected by any change in the exchange rate between the two currencies.

      Basically, you have then made two investments: One in stocks and one in the US dollar. If that is your intent, no problem. Just be sure to understand that’s what’s happening when you buy VTI, whereas VUS is attempting to remove it from the mix.

      Finally, you give me pause when you say “assuming that Canadian dollar is at historical heights and only has one way to go (down).” You may have excellent reasons for coming to this conclusion. But predicting the direction of currency values is a very tricky prospect. Be careful.

      I certainly have no idea what the future for the CA dollar holds, although since I like visiting Canada, down works for me. 🙂

      Hope this helps!

  2. Trish says

    Again, wish I had understood this long ago!
    So, generally, if I hold a bond until it matures, I don’t care about the yield.
    And holding a bond fund, I don’t even care about the individual funds. and if I think inflation is coming, then houses are better than stocks and stocks are better than bonds. Thank you!

    • jlcollinsnh says

      Glad to help, but let me clarify a couple of points.

      “if I hold a bond until it matures, I don’t care about the yield.”
      Actually, we always care about the yield. It is the main reason to buy bonds. ‘Yield’ is a bit of a tricky word in the bond world, having a couple of different definitions. Which is why I avoided it in the post. But, for our purposes, think of it as the interest rate a bond pays.

      “And holding a bond fund, I don’t even care about the individual funds.”
      I think you meant to say: And holding a bond fund, I don’t even care about the individual bonds in the fund.

      “if I think inflation is coming, then houses are better than stocks and stocks are better than bonds.”
      Generally, yes. But, and as the seasoned RE investment pro I know you to be you know this, it depends on the specific houses and their location. 😉

      • Trish says

        Okay, then maybe I’m not as clear as I thought. I thought interest is one thing, but yield is the difference in the attractiveness of the bond in the secondary market as interest rates change. So I’ll go back and reread things – slowly.
        And about those houses, yes, they’re not bad. I still have a few, maybe 6.
        But if I had known what I’ve learned from your blog long ago, I would reconsider buying anything!

  3. gestalt162 says

    Good introduction piece, but I disagree on your last point there, Jim. The type of bond does have an important feature- tax exemption! Interest income exemption from federal and/or state taxes can have a sizable impact on returns, and is worth discussing.

    • jlcollinsnh says

      Hi Gestalt….

      Nice to see you here.

      Point well taken, and this is the problem with writing about bonds: Where to draw the finish line. 😉

      Tax exempt munis (municipal bonds) are certainly a worthy topic and could easily be a post all their own. I’ve always been impressed with your knowledge on the MMM forums, so please feel free to add to my comments if you care to.

      In short, these are bonds issued by local governments and government agencies, typically to fund public works projects like schools, airports and the like.

      While offering lower interest rates than other bonds they have the advantage of being exempt from the Federal income tax and, for the state in which they are issued, state income tax.This makes them appealing to folks in high income tax brackets, especially if they live in a high income tax state.

      Since they are not held in our simple path bond funds, VBTLX and VFIDX, I merrily skipped ’em for this post.

      Vanguard has several funds devoted to munis, including several focused on specific states. Anyone interested can check them out here:

      BTW, thanks for occasionally linking my posts on Reddit. I always see a flow of new readers when you do.

      • gestalt162 says

        That’s a good explanation of Muni bonds. It should also be noted that interest from U.S. Treasury Bonds (which are widely held in our favorite bond index funds) is exempt from state and local taxes, which if you live in a high-tax state like me (NY), can boost your returns somewhat (in my case, over 6% in tax exemption). I’m sure your Nevadan readers will care less. It should also be noted that there is a school of thought that believes that the tax point is moot, as the returns on muni bonds are low enough (compared to corporate bonds) to offset the tax advantages they provide.

        I make sure that our readers in the subreddit are exposed to the most kickass FI articles from around the web. Keep on writing kickass articles, and I’ll make sure they get posted.

        • jlcollinsnh says

          great points, especially the balance on return between munis and corp. no free lunch.


          I should have hit you up for a guest post on this. Bonds are my least favorite investment topic. 😉

          Thanks for spreading the word!

      • Dick50=>82? says

        Check out VTEAX, a real index fund, holds lots of bonds, more than you can imagine, linked with an ETF for that advantage, risk level 2, great if you want regular, every month, and tax free, and mid range. I switched my bond fund when they started forcing Capital Gains on my on Dec 30th. Believe it or not, I have been using your “invest half your income and just use VTSAX and a bond fund for more than 30 years.” Tax lost VWALX to VTEAX just last year. I’m 82.

          • Dick50=>82? says

            JL, I’m so old, taxable was my only choice along with a pension that took the place of social security but started at age 50. Consequently, I have no RMDs either. Your book is so wonderful I give it to children and friends and let you take the blame for giving advice to others.🤓. My other favorite book is Attia’s “Outlive” endorsing the other thing I’ve been trying to do my whole life. You might find it a good companion match for your book. Both you guys read your audio version and I listen to them both for the great voices and reminders of what I’m doing during my power walking for long duration (10 mi/d). I also did your HSA trick for investing, at least simulating a Roth+. Thank you for all you do! You are the greatest. Dick

  4. Sheep says

    So, I’ve been worried about the inflation thing myself, and currently not being in bonds at all I’m wondering if I should just continue to stay out of them. But I’m wondering also in your case why VIPSX isn’t what you’d go for. Or how you would feel about I bonds (besides their very small purchase limit) or straight up TIPS. Is it that your timeframe is such that VFIDX will slowly go up as the current bonds in it expire and are replaced with higher-value ones and you just plan to ride it? Or is it that VFIDX hedges against multiple outcomes while VIPSX only hedges against inflation? Sorry if that doesn’t make too much sense.

    • jlcollinsnh says

      Hi Sheep….

      Mostly because I see a negative yield and too much risk in VIPSX and the TIPS (Treasury Inflation Protected Securities) it invests in.

      10 year TIPS sold at a -0.75% yield at the last auction. That’s right, a negative return. This gets a bit tricky as you need to subtract inflation from the bond’s coupon rate to get the real picture. The inflation protection the government provides on the yield comes at a very high cost.

      But even more importantly remember what we learned in Stage V above. When rates fall, bond prices rise. The last few years TIPS (and other bonds) have done spectacularly well as the Fed has relentlessly lowered interest rates.

      But now rates are at zero. No place else to go but up. TIPS with their negative yield actually cost you money to own.

      If the Fed succeeds in reigniting inflation, their next step will be to raise interest rates to keep it from raging out of control. When that happens, TIPS will get killed. As will the long-bonds we discussed above.

      Intermediate bonds, like those in VFIDX, will get hurt too. But at least we are earning a positive yield on them and their shorter maturities will help.

      Either way, this is another reason you definitely want to own your bonds in a fund.

      Since funds hold so many bonds, all bought at different times with different maturity dates, some will be getting paid off freeing up money to reinvest in new bonds paying higher rates. That should soften the blow.

      In theory anyway.

      But if the Fed loses control of inflation, bonds will be a very bad place to be. But our REITS should improve at the same time. We own both, ’cause you can’t predict the future. At least I can’t. 😉

      • Sheep says

        Arg, browser crashed and ate my reply but I basically wanted to say thank you for the reply. I think the TIPS thing does make sense to me because I guess the interest rate is set by the market when they’re sold. Also you inspired me to look more into I bonds and I read something that made me realize you always lose against inflation if you buy with a fixed rate lower than your tax rate.

  5. Prob8 says

    Nicely done. I was wondering when the post on bonds was coming. Even though we can’t predict the future, I’m finding it difficult to pull the trigger on bond buying with rates this low.

    • femmefrugality says

      I’m with you on that one. My saving’s account yields more. But it’s great to hear someone actually discussing the dangers of DEflation. A topic that doesn’t get enough attention.

      • jlcollinsnh says

        Hi FF….

        It does surprise me that deflation has gotten so little attention. Especially since a couple of years back we were teetering right on the brink.

        I chalk it up to the fact that only the very eldest of us around have any experience with it.

        If it happens, cash and bonds are where you want your money. Of course, if we get inflation instead the game changes completely. That’s why I hedge for both.

    • jlcollinsnh says

      Thanks Prob8…

      …easy to understand your reluctance. The only reason to own them is for deflation protection and income. The first is looking less likely and there’s not much of the second to be had at the moment.

      With rates falling these last few years the cap gains have been nice, but it’s hard to see how that continues.

      Still, I’ll hold mine as part of a balanced diet. 🙂

  6. chronicrants says

    This is a great post! A small typo: I think that Stage XI should be Stage IX.
    If you’re ever looking for a new post topic, I’d love to see more on deflation. I’ve always been confused about it and about it’s consequences. It seems like it would be a good thing, and yet….

    This explains a lot about bond funds. Now I just have to figure out what to do with the EE savings bonds I got as a kid. I looked them up online and apparently they’re earning interest, but of course I’m not collecting anything, since right now they’re just pieces of paper sitting in a drawer. So confusing!

    Thanks for providing some clarity to the topic of bonds!

    • jlcollinsnh says

      Thank you CR…

      …and thanks for the proofreading catch. Correction made.

      I’ve been pondering your question on deflation and there seems no short answer, so a future post it is!

      Not surprising that you find it a bit confusing. In some cases and in small doses it is a good thing. In other cases it is the ugly dance partner leading depression across the floor. We’ll look at both.

  7. Alram says

    Hello fellow Canadians and Mr. Collins (thank you for your great work, I am learning a lot from you). I just compared VTI and VUS myself and made the decision to go with VTI. I have been monitoring the Canadian dollar and it’s relative strength to the USD and went with the economists who convinced me that the CDN is 10% above it’s historical value. While in the short-term the loonie may stay high due to all the quantitative easing, I think Canada is about to suffer some weakness in housing which will gradually reduce our dollar. Certainly this is just one person’s opinion, but I’d rather bet on the USD over the long-term and hopefully enjoy the potential triple benefit of a rising US stock market, lower MER, and a little currency arbitrage for good measure. The .60 to .70 loonie is still very fresh in my memory!

  8. Le Code Civil says

    Just wanted to say thanks for this whole series. It’s entries like this that make me grateful for the blogging community. I never got into economics or finance at university partly because an article like this would have taken two weeks to cover in class, with all of the associated hand-holding. This was so much more comprehensible and useful to real-world me than any of the classes I took in econ back then. Please keep up the great work, it’s really helpful!

    Also, quick clarification question to make sure I’ve got this down — the reason you shy away from long-term bonds right now is because the rates are currently low across the board (short, intermediate, and long-term), and once inflation increases those rates will be insufficient to make up for the lost future value. Or is it because in a low-inflation or deflationary economy the short-term and intermediate rates are proportionately higher relative to long-term rates, compared to an inflationary economy? Or both? So right now you’re in intermediate, which has slightly lower rates than the long-term but also lower risk, and once inflation picks back up the rates for long-term will increase as well to make up for lost future value and at that point it makes more sense to shift back to long-term? It seems like if you buy long-term in a period of high inflation, when inflation drops that gives you the double benefit of less value lost through inflation than expected, as well as the leftover higher rate. I’m not even considering purchasing right now, just want to understand the interplay between inflation, rates, and yields.

    Thanks again!

    • jlcollinsnh says

      Thanks LCC! (Intriguing handle you have there, BTW.)

      Let me break down your questions and try to clarify:

      “….shy away from long-term bonds right now is because the rates are currently low across the board (short, intermediate, and long-term), and once inflation increases those rates will be insufficient to make up for the lost future value.”


      “Or is it because in a low-inflation or deflationary economy the short-term and intermediate rates are proportionately higher relative to long-term rates, compared to an inflationary economy?”

      No. If we were to go into a long deflationary economy, US government long bonds would be your friend. US Government bonds to reduce default risk. Long term because your money will steadily gain value over the life of the bond as the price of goods and services declines. (I have a post on deflation coming soon.) Bond prices go up when rates go down.

      “So right now you’re in intermediate, which has slightly lower rates than the long-term but also lower risk….”

      Yes. The Fed is working hard to ignite inflation and I think they’ll succeed. ‘Don’t fight the Fed.’ as the Wall Street saying goes. With inflation will come higher interest rates and long bonds will drop in value. Short bonds have the lowest inflation risk, but currently pay nothing. Intermediate bonds pay a decent rate but don’t lock me in like the long bonds would. They are the happy middle choice.

      “…and once inflation picks back up the rates for long-term will increase as well to make up for lost future value and at that point it makes more sense to shift back to long-term?”

      Yes, but it won’t make up for future lost value. It will just mean long-bonds, in fact all bonds, will pay better rates with less risk. Unless, of course, the Fed over shoots and we get excessive inflation. If that happens the game changes again.

      This is why I still recommend, the Total Bond Market Fund for my recommended portfolios. It won’t give the top performance that all this dancing might, but it can absorb both scenarios and investors don’t have to worry about it.

      “It seems like if you buy long-term in a period of high inflation, when inflation drops that gives you the double benefit of less value lost through inflation than expected, as well as the leftover higher rate.”

      True, but a little like saying if you buy stocks when the market goes up you’ll make more money. The trick is to know when that is. In the early 1980s here in the US we had very high inflation. You could buy 30-year US Treasuries, probably the safest investment in the world, that paid 16, 17, 18%. Locked in for 30 years. Looking back it is hard to imagine a much better investment.

      Problem was at the time people thought inflation was going to continue to rise and that would have destroyed these bonds.

      Turns out, inflation fell and they were golden.

      Right around the same time Business Week ran a story with this headline emblazoned on the cover: The Death of Equities.

      The theme was that stocks had taken such an inflation beating that no one would ever be silly enough to own them again. Turns out that marked the beginning of the greatest bull market in history.

      Hope this helps!

  9. S None says

    I enjoy your blog. After reading your post on bonds I got to looking at the yield on my Vanguard short term bond index fund VBIRX and it was only 0.54%. Your VFIDX was >2% and the duration was not too much longer. I switched some funds to VFIDX for potentially better returns for the increased bond term. I then read an article by Larry Swedroe on why you should keep government bond (like VBIRX) instead of corprate bonds (like VFIDX).

    This reminded me why you want to hold uncorrelated investments. I am tired of low bond yields like everyone else, but I don’t need to have bonds crash with stocks.

    I am curious what you think about Swedroe’s article.

    • jlcollinsnh says

      I agree with Swedroe’s article. Basically what he is saying is that bonds become riskier with lower credit ratings and that much below “a” they take on risk profiles similar to stocks. But 80% of what VFIDX holds is rated ‘a’ or higher and nothing is below ‘b’

      A ‘junk’ bond fund like this one is closer to what he is discussing:

      High yield and high, stock like, risk.

      You have identified the low rate VBIRX pays you and in return you are getting a low risk profile. It’s perfect if that is your goal.

      For me, the higher yield of VFIDX is worth the somewhat higher risk. But I’ve also got my finger on the trigger and am watching closely for signs of inflation.

      For the simple wealth portfolios I have created and recommend here VBTLX is the way to go, as I said in the post.

  10. FloridaAdvisor says

    I would still conclude that bond investments as well as stock investments are somewhat dangerous right now. In fact at any given time, there is some level of risk associated with any investment. It’s the nature of investing. Risk is a funny thing. When the stock market is rip roaring, most everyone is willing to take a little more risk than they really should, and when the market is depressed, most are so fearful that little to no level of risk can be tolerated. Neither of these extremes makes for good investing. Thanks for the post.

    • jlcollinsnh says

      Yep. Risk is a constant companion with each and every investment. Even cash in the bank, or mattress, carries a healthy dose of inflation risk.

      As you point out, we tend to be bold when we should be cautious and cautious just when it’s time to be bold.

      This is why, all the way back in Part I, I said:

      “Recognize the counterproductive psychology that causes bad investment decisions and correct it in yourself.”

  11. Edmund says


    I am a huge fan of your blog, even though I never posted here. We are of similar age and have very similar investment philosophy. I am really curious how you would invest if you were in our shoes.

    We invested all these years in 2 funds: Vanguard TSM and Vanguard total international SM. As we approach our exit point (not sure when – we have yet to pay for college, all savings are in retirement accounts), we started buying bonds – Vanguard TBM.

    Like you, I hate bonds, so I decided to start buying them slowly over time (started in 2010), instead of selling 25% of TSM when the time comes (which seems like what you did). Over 20 years I had no problem putting new money to TSM no matter what, and so I became very comfortable with that strategy.

    Now, every time I put even miniscule amount towards TBM, I cringe. So my question is this: given your own personal experience, what would you advise us to do?

    Continue adding bonds until we hit 25% mark, even though the expected real return over next 10 years for TBM is 0%? Or stop buying bonds going forward until we are closer to retirement?

    The youngest will graduate from college in 9 years, so that is the longest we will work; however, depending on stock market performance, and/or potential health issues, we may “finish” sooner.

    We are both self-employed, so we face different risks compared to W-2 employees, but in general our income source is stable and will likely remain so in the future. So as you can see, we do have quite a bit of flexibility.

    We are not risk-averse at all, so we don’t need bonds to reduce volatility. We will need them when we retire; and I will hate selling TSM irregardless, but especially if it’s down.

    So again – how did you approach bond buying investment period of your life, and what have you learned from it?



    • jlcollinsnh says

      Welcome Edmond….

      and thanks for the very kind words! Glad you like it here.

      First, congratulations!

      20 years investing in the total stock market is a great run and I’m sure has served you well. I can see why you cringe at the thought of selling to buy bonds. The good news is that in you situation, you don’t have to.

      You are still working and is sounds like you plan to continue for awhile. But you also wisely recognize it might not be you who decides exactly when that ends. So, you need bonds, but not all at once.

      Basically, I’d continue exactly what it sounds like you are doing: Buy the bond fund slowly over time until you hit the 25% level.

      By the way, there is nothing magic about 25%. It is just what I use as it is a fairly aggressive, growth position. The ‘common’ wisdom for guys our age is to hold 40-60% in bonds. That’s too conservative for my tastes, but the point is everybody can and should adjust the percentage to their own needs.

      In building your bond position over time this way you are “dollar cost averaging” (DCA) into them. Ordinarily I am not a DCA fan as it warps a portfolio’s asset allocation until it is completed. But in your case it provides two nice advantages:

      1. You avoid having to sell TSM shares to buy the bonds.
      2. You avoid some of the interest rate risk built in to bonds at the moment. With rates near historic lows and the FED hinting it is getting ready to let them rise, bonds are very risky here. Buying in slowly with DCA will dramatically soften any hit your bonds will take and will allow you to buy as they become more attractive.

      Now an astute reader of this blog will notice that #2 violates one of my basic concepts here: You can’t time the market. Usually I am making that point in regards to stocks, but it applies equally to interest rates and, by extension, bonds.

      But sometimes, and for interest rates in my judgement this is one of those times, things get so lopsided that a little timing/caution pays off. It is very hard to see how rates don’t rise from here driving down the price of bonds.

      But not impossible, which is why I’m not suggesting you wait to begin building your position.

      As for how I built my bond holding, I did it all at once. But I had some poorly chosen leftover investments I could unload to create the position. Unlike you, I wasn’t wise enough, soon enough in going all VTSAX. 🙂

      Hope this helps!

      • Edmund says


        Thanks so much for sharing your thoughts!

        I really am not any wiser than you – I learned the hard way. I started buying individual stocks, thinking it is so easy to beat the market, why would anyone buy a mutual fund. Boy, was I ever wrong! So I sold all those stocks and went with TSM, and later on started buying TISM as well.

        Like you, I understand investors “should” own bonds, most commonly cited “age in bonds” by the saint Jack Bogle. But we are aggressive investors, and are very comfortable with it, never sold in 2002 or 2008. It’s what we thought our kids – invest in stocks while young, worry about bonds later in your life. We always knew we will need bonds later, and decided somewhere between 20-30%, depending on circumstances. So 25% is the average of that, and has really nothing to do with your number, it just indicates to me our thought process and risk tolerance are very similar to yours.

        By this time last year, we got to 15%. When we rebalanced earlier this year (with new contributions only, we never had to sell to rebalance), a lot went to TBM to get back to 15%. By now, we are down to 14%. Like you, I don’t like timing the market, but bonds still look very expensive, that’s why I cringe when I add our hard earned money to TBM these days. So last 2 months, our retirement contributions have been sitting in cash, because I just cannot bring myself to add new money to TBM just to keep overall percentage of bonds at 15%. I never had this hesitation with TSM, whether it was hitting new highs or new lows, or anywhere in between. I now understand how people afraid of stocks feel.

        Are you suggesting to keep buying bonds, but not increase TBM allocation over 15%? Or not buying bonds at all, and keep putting new money to equities only, until rates rise? (Market timing, which did not serve me well in distant past, so not sure how that would play out). Or, keep buying more, so as to increase TBM AA by 1% each year, so 15% in 2013, 16% in 2014, and so on?

        I know I could do what you did – just wait, and convert all at once. But that is truly risky – I would not want to do that if another 2008 arrived. On the other hand, putting money into investment that is going to earn 0.5% real return over the next 10 years seems like the stupidest investment idea ever! I guess I am looking for suggestions I have not thought of from a person with similar values and risk tolerance.

        Thanks again!


        • jlcollinsnh says

          With 15% in bonds already, if your target allocation is 25% in ~9 years from now when you plan retiring you could either:

          1. Add slowly to the position over the next 9 years to add the next 10%. This should give you money to keep adding to your stock positions, too. or
          2. Hold what you now have in bonds and just add the 10% in a lump when the time comes.

          #2 would be my path. I’m aggressive and if still working 15% would give me enough bonds until I stopped. It would also give me a nice pool to draw on if stocks were to take another major hit.

          • Edmund says

            Thanks, Jim. That’s what I was thinking as well. I appreciate you taking your time to reply. Keep up the good work, I enjoy reading your life stories.

  12. Clint says

    Reposting from a while ago, per your request:

    There’s a lot of noise these days about the “bond bubble bursting.” Is this a perfect example of the kind of noise one should tune out if in for the long haul (20+ years), or is this an actual long-term concern that should make one wary of bonds? I’ve even seen some on the Bogleheads forum and wiki suggesting all kinds of alternatives to bonds…

    I’m 34, in the wealth building stage, and currently allocating 20% to VBTIX.

    Thanks so much. I can’t tell you how much I appreciate, enjoy, and share your investing series.

    • Clint says

      Specifically, I hear a lot about TIPS and corporate bonds. In addition to my question above, is there any reason to think about adding these as well?

    • jlcollinsnh says

      Hi Clint…

      Welcome and thanks for your patience!

      ““bond bubble bursting.” Is this a perfect example of the kind of noise one should tune out if in for the long haul (20+ years), or is this an actual long-term concern that should make one wary of bonds?”

      Exactly. Both.

      From these levels it is hard to see interest rates not rise — in fact they already have slightly — and that will be bad for bonds. But this is also predicting the future, something that is vanishingly difficult to do.

      The better question is to ask, “Why do you hold bonds and do those reasons still apply?”

      As I say in the article, I hate bonds. But I hold them now because…

      1. I no longer have a working income and have moved into the “Wealth preservation phase.”

      2. My bonds provide a hedge against deflationary events.

      3. They pay a little income while they go about their work in #2.

      If, like you, I were 34 and in my wealth building stage I wouldn’t bother with them. Especially in today’s environment. At the moment, I consider them the riskiest things I own. But for me they fill a role and so I hold my nose and hold them.

      As for alternatives, I don’t bother much. That is a form of market timing that is inconstant with my simple approach to this stuff.

      Although, if you read deep enough into that post above, you’ll see I’m currently holding VFIDX. This is Vanguard’s Intermediate-Term Investment Grade Index Bond fund.

      So, there you go! 🙂

      • Clint says

        Not to belabor the point, but I want to put this to bed in my mind :)…

        In my 401K, I’m actually given VFIUX (Vanguard Intermediate-Term Treasury Fund Admiral Shares, ER .10%) as an option, as well as DIPSX (DFA Inflation-Protected Securities, ER .13%).

        I’m probably more comfortable holding at least a small bond position (maybe 10 – 15% of my otherwise entirely VTSAX or equivalent portfolio, if for some “dry powder” at the next correction). That said, any value on my 20 year timeframe to split up my bond position into VBTIX and/ or one of the above?


        • jlcollinsnh says

          Welcome back, Clint. Been awhile. 😉

          With a 20 year time frame and using your bond position to rebalance into stocks on dips, VBTIX should serve you well and it is what I’d use.

          Were you to add DIPSX and/or VFIUX in effect you would be overweighing into Treasuries. Less yield for a bit less default risk.

          No right or wrong answer. Depends on your needs, risk tolerance and goals.

  13. Susan says

    Hi Jim,

    Per your recommendation, I’m working my way through the Stock Series again, and have spent a good part of the weekend reviewing our entire portfolio. Our retirement accounts are with Fidelity, and I am in the process of investing the bond portion of the portfolio in those accounts, after re-reading this section of your series. The plan was to put one third of the bonds in Fidelity’s total bond index fund (in my husband’s rollover IRA with 15 to 20 years until we’d access it), and two thirds into VFIDX (my Keogh, 8 year time horizon until I’m 59.5 and latest I’d like to retire.). Unfortunately, I have just found out that I cannot purchase VFIDX (Admiral Shares) – only the Investor Class equivalent VFICX which carries almost double the expense fees. Is there a Vanguard ETF version that I should choose instead? I am able to purchase the ETFs through Fidelity. I think the closest to VFIDX would be VCIT? Or just go with VFICX, which is still relatively low at .20?

    By the way, thank you again for your encouragement! Just by doing my homework, we will already save nearly $3000 in yearly expense fees by dumping the Fidelity Freedom target year retirement fund that my husband had his rollover IRA invested in, and replacing it with equivalent percentages of low cost index funds. You should have seen his face when I showed him the calculations! I couldn’t believe it either!

    Best regards,

    • jlcollinsnh says

      Hi Susan…

      $3000 in annual fees. Yikes! Fine bit of “found money” that.

      Obviously you are doing a fine job of analyzing this stuff on your own. VCIT looks to me like the closest ETF match for VFIDX as well.

      Nice job!

  14. Richard says

    Hi Mr. Collins!

    In one of the comments above you said:

    “By the way, there is nothing magic about 25%. It is just what I use as it is a fairly aggressive, growth position. The ‘common’ wisdom for guys our age is to hold 40-60% in bonds. That’s too conservative for my tastes, but the point is everybody can and should adjust the percentage to their own needs.”

    I know you have mentioned in part V: ” The typical investment advisor’s rule of thumb is: subtract your age from 100 (or 120). ” I also know you said you disagreed with that.

    So – how does one determine what percentage is appropriate for them?


  15. JB says

    hello Mr. Collins!

    First time poster here. Since the fund minimum for VFIDX is $50,000, would you recommend the investor class version, VFICX (double the expense ratio), as a good alternative? I have about 75% in VTSAX and could not decide what to do w/the remaining 25%–as I did want to go 100% stocks for my asset allocation.

    I really appreciate the time and effort you have put into your stock series, it has been a pleasure reading your posts.

    • jlcollinsnh says

      Welcome JB…

      Glad you’ve enjoyed the posts.

      As you know, my bond fund recommendation is VBTLX with its ER of .08% and interest payment of 2.57%.

      VFIDX is what I’m personally using at the moment and subject to change without notice. Its ER is .10% and it pays 3.24%, or a net payout gain of .65%. Pretty thin for the extra risk.

      If my reasons for holding VFIDX make sense to you, VFICX will give you exactly the same portfolio, but as you noted, with a .20% ER. That cuts the payout advantage to a thinner still .55%. Whether that is enough for you is a very personal choice and a question only you can answer.

      As for holding bonds at all or going 100% stocks, this post might help:

      Good luck!

      • JB says

        Mr Collins,

        Thanks for the reply! So, based on that slight payout advantage, I’m leaning towards just staying with VBTLX for now. Also, I have read the Asset Allocation post multiple times, but there is one question that I can’t seem to determine a good answer for. If someone is in the “wealth acquisition” stage, is it still worthwhile to have a percentage of investments in an alternate financial instrument like bonds–note, this is for IRA/Roth accounts vs a standard taxable investment account.

        The purpose of these bond investments would (hopefully) be the purchasing power in a bear market to increase your holdings of index stock funds by selling bond funds and buying stock funds, then re-purchasing those bond funds when the market recovers. If I had 100% of my investments in VTSAX, for example, then I would be unable to capitalize on the opportunity to buy more of that fund when the inevitable market downturn occurs, beyond any remaining traditional IRA/Roth contributions for that year.

        I look forward to your thoughts.

        • jlcollinsnh says

          Your understanding is sound, JB.

          Bonds smooth the ride and give you some capital to shift to stocks in bear markets. The trade off is that in bull markets, whatever portion you have in bonds misses the upswing.

          Since the research seems to say 100% stocks and 75/25 have produced almost the same results over time, it depends on how you want to get there. And a lot on how actively involved you want to be, mostly for that smoother ride.

          This is really fine-tuning. Once you are at this stage, you’re results will be determined much more by how well you stay the course with whatever allocation you choose.

          Make sense?

  16. Mark says

    Jim- slowly making my way through your stock series and really enjoying it. You said that you expect inflation to go change (go up) hard and fast, hence the decision to hold the vanguard intermediate bonds. Since it’s been a few years since you posted this I’m curious what you think now about where price levels are headed. I believe your original hypothesis holds true–i.e. you can’t expand the money supply (technical definition of inflation) without a parallel increase in prices (standard accepted definition of inflation). The question is when, not if, will prices spike up. Thanks for your thoughts.

    • jlcollinsnh says

      Hi Mark…

      Well this is embarrassing.

      While preaching relentlessly the silliness of trying to predict the stock market, I went and predicted interest rates. If anything, interest rates are even MORE unpredictable.

      And, predictably, I got my ass handed to me. 😉

      Truth is, long-term bonds have produced fabulous returns because rates have, counter to my prediction, continued to fall.

      I do think my original hypothesis is accurate, but my timing is clearly off. And, of course, timing is everything!

      It’s just like the market timers I mock who keep being wrong in their prediction of a fall. Someday they will be right. But timing matters.

      Right now the dollar is continuing to strengthen against other world currencies and deflation seems the bigger risk than inflation. How long that will last and when it will turn, I haven’t a clue.

      See? I may be slow. But I am teachable. 🙂

      Meanwhile, I still hold, and plan to continue to hold, VFIDX.

      Great comment/question!

      • Mark says

        Thanks, and appreciate the honesty! I should probably take your advice and stop trying to predict these things myself…

  17. PencilThinMustache says

    My question is related to bonds and where they should be held: taxable or tax deferred? I’m in 33% bracket, and I’ve been advised to hold bonds in tax deferred (401k) because of their overall tax inefficiency. Do you agree?

    In my particular case, the 401k only offers PIMCO total return at 0.85% cost, obviously not ideal, but that’s where I have my 20% portfolio allocation now.

    What are your thoughts on using a federal tax exempt bond fund (I live in FL) like VWAHX or VWITX in my taxable account instead, and filling my 401k with VITSX at 0.04% ER?

    The goal here would be to chase the guaranteed “returns” of tax efficiency and low costs while losing out on returns.

    • jlcollinsnh says

      Yep. Tax advantaged accounts are the place for bonds and we hold ours in our IRA.

      That said, an ER of .85% is awfully steep, especially for a bond fund.

      VWITX has a 3.7% yield and a .20% ER
      VWITX has a 2.99% yield and a .20% ER

      Those are handsome tax-free yields, but both also hold some bonds of less that investment grade to get there. So, a bit more risk.

      In the 33% bracket, these begin to look tempting and you’re thinking correctly.

      Run the numbers and give some thought to your risk tolerance. If after that it still looks good to you, it probably is.

      • PencilThinMustache says

        what exactly are the tax consequences of bonds in a tax deferred account like a 401k vs “tax exempt” bond funds held in a taxable account?

        In a 401k, the “income stream” the bonds throw off would be reinvested in the fund and would be untaxed now, and it would grow tax free for years. But once that grows into a sizable sum of money, won’t it be taxed at retirement?

        On the other hand, aren’t tax exempt funds tax free forever? That is, if I let them sit in taxable account for years and re-invested income, they would remain tax free in retirement?

        maybe I’m not understanding this correctly, but it seems that anything tax free would be a very good thing!

      • jlcollinsnh says

        You’ve got it.

        Interest and capital gains (and dividends) are all tax free in a tax advantaged accounts until you begin withdrawals.

        Withdrawals are taxed at your ordinary income rate upon withdrawal after age 59.5. Before that there are also penalties.

        At 70.5 RMDs must begin:

        On the other hand, Muni-bond funds (tax free bond funds) are exempt from Federal income tax.

        This allows them to pay less interest than taxable bonds of an equivalent credit rating, which is the purpose of making them tax free: To attract investors to government bonds at a cheaper rate.

        The two funds you are looking at pay pretty generous interest rates. This is because for a certain percentage of the fund they are buying bonds that are less than “investment grade.” Lower grade bonds must pay higher interest rates to attract investors and to compensate them for the additional risk.

        • Jager says

          Mr. Collins,
          I have a follow-on question for where best to hold bond funds, with a tangentially-related question about the Vanguard Wellesley fund.

          If I understand it correctly, the above-mentioned tax inefficiency of a bond fund results from the income one receives each year. Depending on one’s bracket, this could counteract the benefits of T-IRAs, TSP, etc., right?

          As such, what in your mind would be the disadvantage of holding a portion of one’s taxable account in admiral shares of the Wellesley fund? Our intent would be to hold some short-term money in a fund that would reasonably preserve capital while also growing reasonably well, too. The ER is obviously one disadvantage, but it seems there are tax disadvantages, too.

        • jlcollinsnh says

          Wellesley is a balanced fund that holds ~40/60% stock/bond balance.

          Because bonds pay interest they are considered tax-inefficient and so are better held in a tax-advantaged account.

          More importantly, even with 60% bonds, Wellesley still has significant downside risk in a bear market and so is a fairly high-risk choice for truly short-term money.

          But if you want to use it to hold your short-term money, you are stuck with the tax-inefficiency.

          Assuming you are not holding large sums short-term, this is less of a factor in my mind that the short-term suitability of Wellesley.

          Make sense?

          • Jager says

            Indeed it does, thanks so much for your prompt and patient replies.

            What you do, and what your blog represents, is a shining example of servant leadership.

            Merry Christmas to you and your family!

          • jlcollinsnh says

            Merry Christmas to you and yours as well, Jager!

            Thank you for your very kind words and for simply acknowledging my response to your question. I always appreciate it when people let me know that they actually read the answers I offer. 🙂

  18. Michael F. says

    Greetings Mr. Collins,

    I am super new to the investing world, and I want to start off by saying THANK YOU. The information that you’ve provided throughout the stock series have opened up my eyes in terms of becoming financially free and making smart investments for the long term.

    Before I begin my journey I want take care of my retirement plan. Currently my 401(k) is with my previous employer (HUGE MISTAKE! I know!) and it is a pre-taxed Account with Charles Schwab. The fund is a Life Path Index 2050 O and the balance is roughly $3500 (Small number I know!) After reading through your series, I would like to roll my current 401(k) into a ROTH IRA with Vanguard.

    I called Vanguard on the phone and we created an account. When it was time for me to pick the fund (not sure if Im using the right terminology) I chose VBMFX instead of VTSAX because it had the minimum requirement of 3000. Is it worth it to invest the 3500 into the VBMFX or should I just keep the money where it is? I read your section on Bonds and the danger of investing all your money into them. Any advice would be greatly appreciated!


    Michael F.

  19. Dave says

    Hello Mr. C.

    You have changed my mindset on investing. I thank you for that.

    I’m interested in your move to intermediate-term bonds. I assume this was several years ago and am wondering how your thoughts have changed given the situation now. The probability of rate hikes is likely much higher now than it was a couple of years ago.

    Given Yellen says rates will increase slowly, starting as early as Sept or possibly as late as next year. Nobody knows what will happen.

    What is your take now? Still staying put in intermediate or perhaps looking to short term bonds? Some may argue the bond bubble is about to burst and a MM that pays nothing is better for maybe a year or so.

    What is your criteria for getting back into the total bond market fund?


    • jlcollinsnh says

      Hi Dave…

      Check out my conversation above with Mark starting on 3/14/15. It covers most of what you are asking.

      I don’t know if I will ever get back into VBTLX, but I still think it is the best option for most investors.

      In a very real sense, a total bond fund like VBTLX averages out to be an intermediate bond fund. So the real difference is VFIDX is tilted more towards corporate bonds.

      While it focuses on investment grade bonds, this still makes it a bit more risky than VBTLX which holds a large percentage in government bonds. This is why VFIDX pays a slightly higher interest rate: 3.1% v 2.47%

      So, a bit more risk for a bit more reward.

      Make sense?

      • Dave says

        oops, sorry I’m missed the conversation with Mark. Sometimes when I’m going through the comments I might not pick up where I left off. There so much good information it’s hard to absorb it all without multiple readings.

        Thank you for your time
        Looking forward to the book.

  20. Elena says

    Love your website! Thanks for all your tips on here!
    A couple of quick questions if you don’t mind:
    1) What recommendation would you give to those who cannot buy VFIDX since it requires $50,000 minimum investment? Will VBILX work?
    2) Also I did research on Vanguard site and it says that VBTLX that you recommend for simple path portfolio is also Intermediate Term Bond Fund. Would you still rather recommend to get VFIDX instead of VBLTX because it’s 75% invested in corporate bonds?
    Thank you in advance!

    • jlcollinsnh says

      Welcome Elena…

      Glad you like it!

      1) VFIDX has an ‘investor shares” version: VFICX. Exact same portfolio, $3000 minimum but a higher ER — .20 v.10 and a 2.74% yield.

      VBILX is also a fine choice with a 10k minimum, .10% ER and a 2.62% yield. Taking both yield and cost into consideration, it is a toss up.

      2) As for VBTLX, quoting Vanguard, “the fund invests about 30% in corporate bonds and 70% in U.S. government bonds of all maturities (short-, intermediate-, and long-term issues).” They call it an “intermediate-term bond fund” because all those maturities average out to be intermediate. The ER is a nice low .07% but the yield is also low at 2.17%.

      VFIDX holds mostly corporate bonds which are considered higher risk than the 70% government bonds VBLTX holds. But in my view the risk difference is small.

      So, for now at least, I prefer VFIDX for the better yield.

      Hope this helps!

  21. Chris says

    I’ve spent some time thinking about this ‘smoothness’.

    If the idea is a 4% withdrawal, based on your final working investment amount, then what does ‘smoothness’ matter? If you are not changing your 4% (to be 4% of the total of the portfolio each year) then your withdrawal amount will always be the same (notwithstanding inflation).

    Whether your portfolio halves to 500k (and you still withdraw 40k) and quadruples to 2,000k the next year is of no concern to you.

    The biggest (and only) risk, is the portfolio being drawn down to 0. This risk is increased by adding bonds, is it not?

  22. George Valashinas says

    Hi there! I hope your travels are going well…Im so jealous.
    My wife and I are new followers of yours and look forward to learning a lot of things that can help us on our path to FI.
    What is your stance on VFIDX vs VBTLX with the recent events?
    Looking forward to hearing from you soon.
    Always my best,

    • jlcollinsnh says

      Hi George…

      I’m not sure what the recent events to which you refer are, but if you read deeply enough into the post above you find my take on VFIDX v. VBTLX.

      The travels were awesome! Thanks for asking! 🙂

  23. dana says

    Thanks for your Stock series! I am a learning a ton, I loved hearing you on the Fientist podcast too:) I am almost there with transferring and adjusting my 403b choices – took your and mmm advice and went with mostly VTSAX, which is great my school has it. I have 101k in there so far. It doesn’t have the Vanguard bond fund you mentioned though, it only has VUSUX. I am 40 so have set it to 4%, I also have another 4% in BlackRock Inflation Protected Bond K Any thoughts on these 2?
    I am also stuck on my international choices as only have VEMAX for vanguard option so I am almost finger on the trigger for 100% VTSAX after watching a ton of Bogle Youtubes 🙂

    • jlcollinsnh says

      Thanks Dana…

      That MF interview was a lot of fun to do!

      BPLBX (your Blackrock fund) has an expense ratio of .43% (high for a bond fund) and yields only .18% so your interest rate return is negative.

      Part of the reason is it it an inflation protected (TIP) fund and in exchange for that you get the lower yield.

      VUSUX has a much lower ER, .10%, and a yield of 2.77%. But it is a long-term bond fund and that carries more risk.

      If you want bonds, I’d look for a total or intermediate term fund. It should give you much the same yield with lower risk.

      Look first at the Vanguard options for the low ERs. ERs are very important, especially in bond funds where the interest rate yield is critical.

      Personally, I don’t see the need for international exposure for US investors. Here’s why:

      • dana says

        Thanks so much for your reply! Maybe I should just get out of bonds and international.. I had a look at the bond choices, not many to choose between anyway- to be honest Bonds still confuse me, despite reading your post-which is very good, but i guess i got a little bored towards the end haha. All the below bonds i can choose have expensive ERs too, only that Vanguard one is cheaper.

        Short Bonds/Stable/MMkt

        Standard Stable Asset Fund II

        Calvert Short Duration Income I

        Prudential Short-Term Corporate Bd Q

        Wells Fargo Shrt Duratn Gov Bnd Inst 0%

        Interm./Long-Term Bonds

        BlackRock Inflation Protected Bond K

        Delaware Extended Duration Bond Inst

        Vanguard Long-Term Treasury Admiral

        • dana says

          Thanks, I will read those for sure. You can delete this since it is OT, but I was wondering if you would entertain a post on Gold and silver? In 2008 an ex boyf went a little nuts on the conspiracy theories and got me into buying actual gold and silver. I still own 38k of it. I don’t know what to do since it has lost a little value since then, so I have just held it.I don’t see it mentioned much on the forums over at mmm, or bogleheads or on different blogs. All the best, hope you have a lovely rest of the day!

          • jlcollinsnh says

            Do me a favor?

            Post this as a question on Ask jlcollinsnh.

            It will be a better fit there.


  24. Matt says

    In place of VBTLX I’ve been using VFSUX for the time being. My thinking is it is not far behind in yield — only .16%, but has less than than half the duration — 2.6 vs 5.7 for VBTLX. I plan to eventually get over to VBTLX when rates are closer to normal and I figure I will have lost less in the NAV when that time comes.

    Excellent blog!

    • jlcollinsnh says

      Thanks Matt!

      When I checked just now the spread between the two has grown to .37

      Still, not a bad conservative strategy if you think rates are poised to rise soon and you are willing to watch for the moment. 🙂

  25. Tom says

    Great blog, I find the information you provide and the comments you moderate to be incredibly helpful. I’m especially fed up with paying active management fees for results that don’t outperform the market.

    My wife and I are at retirement age, both drawing social security – supplemented by my IRA withdrawals of about 3.5% of my IRA. To minimize management fees, I’m moving my portfolio to Vanguard and placing 60% in stocks, 40% in bonds. I intend to follow your simplified approach, one index fund for stocks (VTSAX), one index fund for bonds. In late 2015 you seemed to prefer VFIDX (instead of VBTLX) as your bond index fund; is that your current recommendation at this point in 2016? Or as someone not interested in a complicated approach, should I stick to your simplified approach and go with VBTLX? Many thanks!

    • jlcollinsnh says

      Thanks Tom!

      Clearly you read far enough into the post to discover my VFIDX secret. Yep, that’s what I still own.

      It focuses on corporate bonds and pays a slightly better interest rate.

      But it is more narrowly focused than VBTLX and therefore higher risk.

      For most people VBTLX is the safer choice. You can own it forever and not worry much. The broad diversification reduces risk. So that’s what I recommend.

      I keep a close eye on VFIDX and someday might flee back to VBTLX. Or not. I don’t want to overstate the situation and I also don’t want to have to alert people if and when I change. 🙂

      When my book comes out, it will recommend VBTLX.

      • aj says

        Hey just an FYI, that fund VFIDX is not an index fund. It is an actively managed bond fund. It does however have low turnover and is managed very conservatively, I own it as well. Just thought you would want to be accurate for your readers. Vanguard does offer and intermediate index bond fund VBILX which is about 50/50 treasury and corporate. One idea for you that Jack Bogle has discussed before is holding 50% in total bond and 50% in intermediate investment grade to give an overall allocation to government bonds of 35%, government bonds have become too large a part of the barclays index (total bond). He explains it on you tube somewhere. Can’t find the link. He says tilting towards corporate bonds has a reasonable risk/reward because of spreads and rate environment. Love the blog, keep up the good work!

        • jlcollinsnh says

          Great catch, aj!

          This post has been up since 2012 and nobody caught this before you.

          Good point on VBILX and the strategy of using them both.

          Glad you’re enjoying the blog. Keep your eagle eye peeled for my other blunders! 🙂

  26. Adam says

    What about us International Readers? In my case the domestic choice of bonds / funds is pretty weak, so I’m looking at buying US-listed funds.

    I can buy BND (The ETF form of VBTLX), but being US-only seems a bit short-sighted for someone that has no plans to retire in the US. It seems like buying Vanguard bond funds would be a double investment, one in US bonds, one in the dollar. Plus, US funds are subject to withholding taxes. However, there doesn’t seem to be much of a choice if I want good global exposure. Vanguard also provide BNDX, which is an international version of BND, but 1) It excludes the US and 2) It’s currency-hedged for the USD, which I don’t fully understand in terms of an international investor.

    I’m thinking of buying both BND and BNDX, but I would much rather buy a single all-inclusive fund to minimize transaction fees and remove the need to select an allocation between the two funds myself.

    I found a couple of nice iShares funds listed in London which maybe good for some, but unfortunately they’re not accessible to me, I’m stuck with NYSE only.

  27. Matt says

    Morning from London Mr C,

    Fantastic blog. I have read and re-read the stock series, having made my way here from MMM. Since then I have be devouring blogs and podcasts from yourself, Mad Fientist, Millennial-Revolution and Grizzly Mom & Dad. Thank you for all your efforts putting this information on line for free.

    I have read most of the comment section on the stock series, so apologies if you have answered this before, but I could not find an answer.

    I am 35 and in the wealth building stage, so I am happy with a reasonable level of risk. I have recently switch my investments from an actively managed fund (Neil Woodford) to low cost trackers with Vanguard via Cavendish Fund supermarket.

    I have 40% in FTSE UK All Share Index Unit Trust Acc and 40% in FTSE Dev World ex UK Equity Index Acc.

    I think I have a nice spread in relation to equity allocation across the markets (although some may say I am too heavily weighted in the UK?)
    I would like to invest the final 20% in bonds that complement my equity allocation.
    Is there a UK version of VBTLX or VFIDX that you mention in your blog above?

    Any thoughts would be welcomed!

  28. Dave says

    With interest rates expected to go up again this year, would it be best to wait until after the next rate hike before getting in on one of these bond finds: VWIUX, VBTLX, VFIDX, VFSUX (for my emergency cash).


      • jlcollinsnh says

        Depends on your tax bracket.

        That’s a fed-tax exempt muni-bond fund and as such it pays a lower interest rate than taxable bond funds. So the tax savings needs to be greater than the lost interest.

        Plus it has a $50,000 minimum investment bar to consider…

        But, if it makes sense after those considerations, it looks like a fine option to me.

    • jlcollinsnh says

      Sorry, Dave…

      That’s market timing and ultimately a loser’s game.

      Problem is, folks have been predicting rates were going up for the last ten years or more. Maybe this is the year, maybe not.

      Even if it is, why then invest after the increase? There might be another. And another and another and…

      Until there is again a cut. Good luck predicting all that. 😉

      Here are the bond funds I currently use/like:

      • Dave says

        I believe you said all of your bonds are inside an IRA? I was looking for a bond fund outside of my 401K/IRA. Thanks

      • jlcollinsnh says

        Yep, inside a tax-advantage account is best. But if I were holding it in a taxable account, I’d still choose the same ones.

    • Chris says

      Dave said “With interest rates expected to go up again this year, would it be best to wait until after the next rate hike before getting in on one of these bond funds”.

      If you need to ask this, then you clearly haven’t read the stock series. It is rude to expect Mr. Collins to give his time in answering your question when your clearly can’t be bothered reading the series first.

      If you have read the series, you might need to re read it.

  29. BuddyElf says

    Hi Mr. C,

    I see that you’re using VICSX for your bond allocation now. How do you justify the Purchase fee of 0.25% ?

    I’m still in growth stage of investing at 44 yrs old. Decided on an 80/20 allocation and i have $80k to put in Bonds in a tax advantaged account. Looking at VBTLX, VFIDX, and VICSX.

    • jlcollinsnh says

      Great question, Buddy….

      With difficulty. I choked on it a bit, but figured this will be a very long-tern holding which will dismissed the effect.

      But this is a great example of why, for my readers, I recommend VBTLX.

      My excursions into VICSX and VFIDX are experiments I am willing to undertake but not to recommend to others.

      • BuddyElf says

        Thank you! Thank you!

        I think I’ll sleep well with VBTLX.

        I was also reading Dr. Bernstein and having difficulty understanding which Vanguard bond funds he recommends. In intelligent Asset Allocator he recommended a Short-Term Corporate fund. I think just because of the yield at the time the book was written (5.95%).

        Your choice of Itermediate term corporate bonds seems to resonates with the approach of going for the higher yield over VBTLX. Has me thinking maybe VFIDX is a good place for me to go.

        Noob question, what value do you look at when comparing yield on bond funds? 1-year, YTD, SEC Yield?


        • jlcollinsnh says

          VFIDX can be a good choice, but remember it holds only corporate bonds and so is more risky than VBTLX and more correlated with stocks.

  30. vt says

    Excellent post. What are your thoughts on VWITX versus VWAHX if one were to use one of them in a taxable account and if one is in higher tax bracket?
    Thank you,

    • jlcollinsnh says

      Depends on your risk tolerance.

      VWITX is an intermediate fund and so less affected by interest rate increases.

      VWAHX is a high-yield or “junk” bond fund. These are bonds from less creditworthy organizations and as such those must offer higher interest rates to attract investors. But they have a greater risk of default.

      Personally I use bonds to balance the volatility of stocks and so would go with VWITX.

      • vt says

        Thanks for your reply. How does VTEBX compare to VWITX? VTEBX has a purchase fee. Wonder if it’s worth it.

  31. Lecram says

    Thanks so much for the stock series. Your posts convinced me to put about $80,000 in VTSAX.

    However, now we were trying to figure out if we should put the next $20,000 in VCITX (Vanguard California Long-Term Tax-Exempt Fund Investor Shares) or in VBTLX. We live in California, we are in the high income bracket (over $280,000 b/w two of us), age 40, and plan to retire in 4 – 5 years.

    Any suggestions between the two bond funds?


    • jlcollinsnh says

      Hi Lecram…

      For those in high tax brackets and high tax states like CA, muni-bond funds like VCITX can be very attractive.

      Typically their tax-exempt status allows them to pay less interest to investors. But in this case VCITX pays 3.19% to VBTLX’s 2.64%

      Plus, the ER for VCITX is .19 to VBTLX’s .05, but the extra interest more than makes up for that.

      So the question becomes, how/why is VCITX able to pay more and provide the tax advantage. The answer is that it hold mostly AA-rated bonds. VBTLX holds mostly AAA, which are considered higher quality.

      So, you have a bit more risk with VCITX.

      Since VCITX is focused on only one state, there is also less diversity and so a bit more risk.

      Neither AA bonds or a CA focus is terrible, but the higher interest rate is telling you that investors are demanding and getting a premium for this greater risk.

      Only you can decide if the premium is worth the risk for you.

      • Lecram says

        Thanks so much for the response and great explanation. I have been mulling it over and we decided the extra risk is not worth the tax savings. We will just keep bonds in our tax deferred accounts and keep all of our taxable investments in VTSAX.



  32. Markola says

    Hi Jim! You explained the Inverted Yield Curve above well (and entertainingly) and why it is a thrilling event. Here is another useful piece that helps explain why it’s happening right now:

    This quote makes sense of one of the practical effects if the curve not only flattens but actually inverts: “Specifically, the flattening yield curve makes banking, which is basically the business of borrowing money at short-term rates and lending it at long-term rates, less profitable. And if the yield curve inverts, it means lending money becomes a losing proposition… Either way, the flow of lending is likely to be curtailed. And in the United States, where borrowed money is the lifeblood of economic activity, that can slam the brakes on economic growth.”

    Happy 4th to you!

  33. Tab says

    Hi Mr. Collins,

    This is my first time writing you. I am trying to maximize income and make great decisions on investing. My husband and I have combined income in excess of $300K, but retirement and emergency savings could use a boost. With two kids and in our late 30s, we are 15+ years from retirement. I have some put some money away in VTSAX funds, but would like to allocate some towards bonds. I know you recommended VBLTX, but what are your thoughts on VBTLX? Also, VWAHX is tax exempt. How should I be looking at these? SEC yield and return? Or will the expense ratios eat up any profit?

    • jlcollinsnh says

      Hi Tab…

      Actually the bond fund I recommend is VBTLX.

      VWAHX is a federal tax exempt high yield muni bond fund. The high yield part means that the bonds are of lesser quality and higher risk. This is why it pays the higher interest rate. At your income level, a muni bond fund is worth a look and this one is fine as long as you understand the extra risk involved. For me, if I am willing to accept extra risk, I prefer adding more stocks to my allocation for the much higher potential return than a bit more interest.

      If you live in a high tax state like NY or CA you might also consider a muni-fund focused on bonds in that state and exempt from state income taxes as well.

      With your time horizon to retirement and your income level, I personally would focus on maximizing my saving rate and building my stock holdings. A nice market crash, should it happen, would be welcome so I could buy at bargain prices.

      But your allocation is a very personal choice that only you can make. This might help:

  34. Freedom says

    Hi Mr Collins

    Firstly congratulations for the great blog.

    For someone in high tax bracket looking at parking some cash (5 figures for 6-8 months) in a bond, do you suggest MUB (iShares National Muni Bond) or
    SUB (iShares Short-Term National Muni Bd) due their low ER (0.07%) and tax exemption?


    • jlcollinsnh says

      Hi Freedom…

      If I were going to park less than 100k for less than a year with interest rates this low, I’d just keep it in my money market fund or bank and avoid the interest rate risk.

      If you want to use a bond fund, muni or otherwise, I’d stay short-term to minimize the interest rate risk.

  35. Ross says

    Hi Jim, as always thank you so much for your blog and advice, its helped me learn so much.

    I wanted to ask what your opinion is on the fact that many Bond Index Funds these days contain a high holding of assets classed less than AAA. It seems to me (45.54% by my research) that the majority of these funds actually contain less AAA funds than they do AA-BB assets.

    I dont know much about Bond indexes but I imagine fund managers have to try and track them so I am not too concerned but I am trying to understand this further. Also if you had any thoughts on Bond indexes and how they compare to Stock indexes such as the SP 500 that would also help. I know this isn’t necessarily the most interesting of subjects so I appreciate anyone’s help on the topic.

    Best wishes,


    • jlcollinsnh says

      Thanks for your comment!

      Mr. Collins is currently traveling and unable to respond just now.

      We find for most questions, he has already covered the topic. Using the Search button might very well provide your answer.

  36. AM says

    Hello Mr. Collins,

    Per the center thesis of this particular blog section, bonds tend to do well when interest rates fall, and they can act as a ballast during bear markets.

    Given that interest rates are already at rock bottom levels during the present bull phase, how do you think bonds are going to perform in the next bear market? There is only a limited scope to cut the interest rates in the upcoming bear market right? Should the expectation be bonds are not going to do as well as they did in the past bear markets?

    What should a long time investor consider about bonds when they are in wealth preservation stage with such low interest rates?


  37. Jess says

    Hello, what is the Fidelity equivalent to Vanguard Total Bond Market Index Fund (VBTLX)? My employer uses Fidelity for 401k. Thank you.

  38. ashg says


    Just now finished with your book. I wished I had got this book 10 years back. I am 32 years old and living in US on work visa. Even though my Green card is in process, god knows when I will get it. But till that time, my situation will always be in limbo.

    I earn 125K every year. Out of it, I spend $42000 on mortgage($2300 /month), utility,grocery, car($300 /month) and every year I try to do $36000 additional principle payment in my mortgage and $6000 in 401K. Rest of the money I keep it in my bank account as a saving for emergency.

    Even though my employer contributes 6%, I am afraid of investing a lot in Retirement accounts like IRA or 401k because of my immigration situation. Because if something goes wrong and I have to leave US, I can withdraw my investment anytime and do not have to wait till my retirement.
    By doing this, I know that am not getting deferred tax advantage. I am interested to invest in VSTLX based on market performance over the years. But considering my situation, how do you recommend to distribute my investment?

    Thank you

  39. Allison says

    Long time listener, first time caller. I’ve been following this model of investing for nearly 25 years and consider myself fairly well versed in Vanguard, the market, etc. Yet, try as I might, I cannot understand bond funds. Bonds I understand. Bond funds and the way they move in relation to the market, are much harder for me to grasp. I’ve had to just accept the wisdom of people smarter than I that my portfolio needs a small percentage in bond funds.

    Yet now we’re hitting a stock slump and my bonds are… also slumping? Is that what’s supposed to happen? I’m pretty tempted to sell the bond funds in my 401k/IRA and use the cash to buy low in the stock market. Then buy individual I-bonds in a non-retirement account.

    Is there anything you can say to help me understand bond funds more? I tried to read the Bogleheads book on it and it still didn’t get through. Am I wrong to dump my bond funds because I don’t understand them and head for individual bonds? I imagine building a bond ladder ala Your Money or Your Life. I understand the underlying interest rate on my I-Bonds is still relatively low, but I’m still young enough to accept the risk of having the vast majority of my money in equities.

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