Gyroscopic Investing

I've done a lot of searches and I've read a lot and it seems to me, if you're in a taxable account, that arguments could be made on both sides for the two plans of either:  1.) Purchasing secondary-market 30-yr bonds from your broker and holding them directly, or 2.) Holding a fund such as VUSTX, which is the fund I've been eyeing for multiple reasons (since I'm a Vanguard customer).

I would be very grateful if you all would help me think through this.  Here are my ideas thus far:


1.) On one hand, holding the bonds directly purchased through the bond desk at your broker (again, for me: Vanguard) has many benefits, such as less/no counter party risk/the direct holding of the bonds, no watering down of holdings with things other than long term bonds, no fund expenses, and a general feeling of having much more control over the holdings (PP purity joyous wonderfulness, etc.).

On the other hand...

2.) It seems like there are things to be said for holding VUSTX if you are a Vanguard customer. First of all, should I wish to set up a direct investment plan (biweekly, monthly, whatever), where investments are made directly on a schedule I choose without my having to log on and tinker with them (I'm overseas and/or not always around internet, so having investments mechanically invested on a pre-determined schedule sounds really lovely, and would be sort of like our automated retirement account investments that come directly out of my husband's paycheck every two weeks), this would be the only way to go as you can't automatically invest with secondarily-purchased bonds.

Also, I really like the idea of being able to log into Vanguard and see at one glimpse how much things are worth, etc., and it sounds like it would be easier to do that if I held the fund, but this isn't really a major consideration, it's just a sort of nice benefit to having a fund.

Furthermore, from a financial perspective, since I'm talking about a taxable account I'm thinking that VUSTX may well kick off less dividends (isn't this fund supposed to be pretty tax-friendly for a taxable investor? More so than the direct holding of the bonds?) and would cost me less because I wouldn't have to sell at the twenty year mark on the bonds in order to buy a new set closer to the thirty year mark, etc.  Though I know that I would have to pay the fees (.20%), which seem like they might be worth it if they save me from having lots of taxable income thrown off yearly and/or accrued when I sell at the 20 year mark.

I'm well aware, though, that VUSTX is less powerful than directly-purchased bonds, and I would be also adding EDV to compensate for the lack of juice.  I'm also aware that using the fund rather than directly purchasing the bonds adds counter-party risk (Vanguard).

Last but not least, it seems that once you're into the fund, you can add smaller sums to it than what is required to purchase bonds on the secondary market. Meaning - if I had, say, $800 that I wanted to toss into VUSTX, I could easily do that without any transaction fees since I'm a Vanguard customer, but if I had $800 earmarked for bonds on the secondary market, I'd be waiting until I could accrue more before being able to buy the bonds on the secondary market. I hope this makes sense.

Any thoughts? Anything I'm not thinking of? Not a shocker that I'm having a hard time choosing between the two. This is me we're talking about...

Thank you...

Often when faced with this kind of investment decision the best thing is to do a bit of both.

As you point out investment/reinvestment is more flexible with a fund.  The fund also offers a place to reinvest the interest thrown off by the actual treasury bonds.  You still have counterparty risk in holding treasury bonds, since they are still held in street name of the brokerage, though.

Be advised that EDV can throw off considerable capital gains.  On the plus side, if you live in a state that has state income tax both the treasury interest and the treasury fund interest are not subject to state income tax.

Vanguard does offer Treasury ETFs (that are not linked to investor-class funds) that are more pure plays on Treasury securities, VGLT for example.

Good luck.

Using EDV plus VUSTX can work, but it sounds too complicated.  Could you use TLT or VGLT instead?

It makes perfect sense to use a fund to accumulate auto-investments.  If you periodically buy bonds from the fund, keeping the total amount in VUSTX low, then I wouldn't worry about it.

With today's interest rates, the income generated by the bonds is not enough to create a significant tax problem.  If you can, though, try to find some tax advantaged space for them, like a Roth or traditional IRA.

sophie wrote: Using EDV plus VUSTX can work, but it sounds too complicated.  Could you use TLT or VGLT instead?

It makes perfect sense to use a fund to accumulate auto-investments.  If you periodically buy bonds from the fund, keeping the total amount in VUSTX low, then I wouldn't worry about it.

With today's interest rates, the income generated by the bonds is not enough to create a significant tax problem.  If you can, though, try to find some tax advantaged space for them, like a Roth or traditional IRA.

In my taxable account a while back I bought EDV/VGLT even split. I did this after a tax loss harvest of TLT. I still have TLT in IRA but not enough room for all my long term bond allocation. EDV/VGLT has been working for me although the even split is now uneven 55%EDV and 45%VGLT. If I get to a rebalance band I will even it out. As of today the LT Bonds are close to 30% of total. If things change and the long term bonds go down I will do another tax loss harvest and buy TLT otherwise if it hits or comes very close to 35% I will rebalance. The taxable distributions from EDV are not the worst thing, at least they give you the money to pay and it is like a mini rebalance.

MomTo2Boys,

I suggest you re-consider the reasons why the PP was specifically designed in hold LTT directly. The advantages you've cited of VUSTX, in my mind, don't come close to outweighing the reasons for direct holding, especially since you are already w/ Vanguard & can easily buy the bonds commission free.

I would buy the bonds directly in a taxable account. You have more flexibility in harvesting gains/losses that way that a fund doesn't give you. Not to mention no need to pay expense ratios or have a manager doing things that could be risky behind the scenes. The Vanguard Treasury funds are OK, but sometimes they load them up with mortgages and other government bonds that add no value to investors using the Permanent Portfolio.

The advantage it has is that it's simple and you don't need to touch it though. Also like you point out you can do smaller purchases easily (and cheaply) frequently.

So you need to decide what is more important to you. Taxable accounts are tough because once you buy an asset and it gets gains it is hard to back out of it and not owe taxes which can be expensive. So consider your options carefully! It looks like you have all the information already distilled so it just comes down to what you want more: convenience vs. safety. It's the eternal balancing act.

craigr wrote: I would buy the bonds directly in a taxable account. You have more flexibility in harvesting gains/losses that way that a fund doesn't give you. Not to mention no need to pay expense ratios or have a manager doing things that could be risky behind the scenes. The Vanguard Treasury funds are OK, but sometimes they load them up with mortgages and other government bonds that add no value to investors using the Permanent Portfolio.

The advantage it has is that it's simple and you don't need to touch it though. Also like you point out you can do smaller purchases easily (and cheaply) frequently.

So you need to decide what is more important to you. Taxable accounts are tough because once you buy an asset and it gets gains it is hard to back out of it and not owe taxes which can be expensive. So consider your options carefully! It looks like you have all the information already distilled so it just comes down to what you want more: convenience vs. safety. It's the eternal balancing act.

I do not understand how holding bonds directly gives you more flexibility in harvesting gains or losses. Seems to me if you hold TLT and it is underwater, you can sell it in one second and buy replacement one second latter (example VGLT/EDV (50/50 split).. Part of the beauty of the PP is the simplicity. Selling each individual Bond and buying a replacement makes your tax return more complicated if you have many sales. Seems to me the fewer the better.

If someone held each individual stock in the S&P500  instead of  SPY or VTI you could argue that you have more flexibility  with gain and loss harvesting but what a hassle that would be when it comes to rebalancing and doing your tax return. I see bonds the same way,one simple index if possible end of story.

steve wrote:I do not understand how holding bonds directly gives you more flexibility in harvesting gains or losses. Seems to me if you hold TLT and it is underwater, you can sell it in one second and buy replacement one second latter (example VGLT/EDV (50/50 split).. Part of the beauty of the PP is the simplicity. Selling each individual Bond and buying a replacement makes your tax return more complicated if you have many sales. Seems to me the fewer the better.

Meaning that the fund is going to be constantly buying/selling bonds in terms of only the bond fund's portfolio. This can generate taxes but also means it's harder to capture losses as well. When you own the bonds directly you can offset your gains/losses against your other assets in the total portfolio. It may not apply to all situations, but it can become useful at times.

If someone held each individual stock in the S&P500  instead of  SPY or VTI you could argue that you have more flexibility  with gain and loss harvesting but what a hassle that would be when it comes to rebalancing and doing your tax return. I see bonds the same way,one simple index if possible end of story.

No I wouldn't say it compares. With the bonds you have a single issuer so the diversification is not needed like you need with stocks. It's simply cheaper and more efficient to own an entire broadly based index fund. In fact, it's a necessity. With bonds though you only own one type from one issuer and there is no other diversification required. So it comes down a to convenience factor in the end.

I agree it's more complicated to own bonds directly, but then again I don't need to worry about what a bond manager behind the scenes is doing with my bonds either (securities lending, buying mortgages, shortening duration, etc.). So it's all a tradeoff.

For the same reason that everyone should own at least some gold bullion in their PP, I think that everyone should own at least some actual LT treasuries in the bond portion of the PP.

Once you've owned some actual bonds for a while and gotten used to seeing them in your account, it makes it a lot easier to move more of your bond allocation into actual bonds.

That's JMHO, of course.