Intermediate bond won’t provide the power that LT bonds will under a sustained deflationary event. I understand that some people don’t like them but the reality is that I’ve been hearing and reading these arguments about their dangers in books and articles for 30 years now. Eventually, these LT bond doomsayers will be right, but so far they’ve been pretty wrong.

2009 was a bad year for LT bonds if you just happened to buy them right at the peak in first couple weeks of January. But after that, they went down perhaps -12% at worst. In terms of the total portfolio even if you bought at the *worst* time you still were up 8% for the year. That’s with a -21% loss in LT bonds when bought at the peak.

But if you just can’t stomach the risk then you can use intermediate bonds but make sure they are Treasuries and not something of lesser quality. Also realize that if we hit a Japan-Style deflation pocket you could be exposed to losses in other parts of the portfolio that your bonds may not be able to cover.

Also realize that by splitting your LT and cash in half you effectively have a duration equal to most intermediate bonds funds. The split of cash and bonds works better than owning just a chunk of intermediate bonds because you get some opportunities to rebalance the bonds when they spike and have cash to buffer recessions when nothing in the portfolio is doing especially well.

#2 I’d try to consolidate accounts to make things simpler if you can. If you can’t do this, then yes you can simply park bonds in one, stocks in another, etc. to make life simpler. This could get complicated though with many accounts and account balances.

2. My husband and I have seven accounts altogether – 6 ira’s and 1 brokerage account.
I have had great difficulty in the past trying to manage each of these accounts as 7 separate portfolios. Time consuming and expensive. Even tho the PP requires less fiddling, I would like to begin to manage them as one portfolio – for example, two iras invested in bonds, two in stocks, etc. Wondered what you thought of this method and am I missing some glaringly obvious drawback? BTW, I have about 10 – 15 years to retirement and 5 of the iras have relatively low balances, one is relatively large and the brokerage account falls in between.

Thanks

I agree we are in no-man’s territory about what the Fed is doing. This is the best reason in the world to stay highly diversified because anything can happen now more than ever. I can come up with scenarios where deflation continues and LT bonds do go up again despite what the Fed does. In the end, the Fed is not omnipotent and can’t make people spend money they don’t have or don’t want to spend. This is what happened in Japan and could happen here. Japanese LT bonds are still trading in the 2% range last time I looked and they’ve been there for over a decade at least.

Re: Canadian,

If you spend time in both places or think you may it could make sense to diversify across both currencies. I don’t know much about the fund you listed though. As for the Canadian dollar, I recall that during the 1990s it did quite poorly next to the US dollar. So anything can happen there as well!

You don’t spread the risk by owning international bonds, you increase it. You take on currency risk. Not only do you need to then worry about the dollar, but also the euro, pound, yen, etc. Interest rates could be going down in the US due to a strengthening dollar, but going up in other places as their currencies fall. The net effect is you could lose in total value of your international bonds even though they appear to be paying a good yield. Since US citizens buy things in dollars it is an additional gamble wagering on currencies that you don’t use for your day to day transactions.

There is also currency risk with international stocks. If you overweight them and the dollar has a long stretch of strong growth then these stocks will appear to underperform the US markets. I think many people look at the last 10 years of good international stock performance for instance but don’t figure in the fact that the US dollar sank somewhere around 30% against currencies like the Euro over that time. So part of the performance was stock related, but some was a currency play.

I recommend keeping your variables as small as possible and not intentionally go out looking for foreign currencies as a way to diversify. It may work out, but it may not. The gold allocation is currency neutral and provides more than enough protection, IMO, against problems in the dollar. So I’d avoid the international bonds entirely and if you want to own some international stocks (I own a small amount myself) then I wouldn’t take it above more than 25% or so of your total stock allocation.