The "market cap" of bonds ie the price of the bond, taken with the coupon, determines the Yield to Maturity. A $5bn US Treasury bond issue trading at $110 (or $1100 per $1000 face/ par/ maturity value) is going to have a total market cap of $5.5bn. Because of the way bonds work, as long as there is no risk of default, the bond price will converge on $100 at time of maturity- -either from higher or lower.I am a newer Boglehead and drinking from the firehose fairly heavily. Thus far I have implemented market cap weighting (S&B 500 80% + extended market index 20%) for my US equities on all of our accounts and tried to do similarly for developed vs emerging markets for international equities. I suppose I am not a purist because 1) I've employed the 20% "compromise" for our international exposure, and also am keeping it simple across our accounts for the sake of simplicity rather than getting incredibly precise with the percentages (for example in my 401k we only have developed markets but in my wife's they have developed and emerging. I haven't bothered to overload her international funds and skip mine to stay true to market cap).
All this being said, I am working on getting a better understanding of bonds. I am 27 (with no debt other than our mortgage + an emergency fund, 2 incomes that are similar-ish and no kids yet) with what I believe to be a high risk tolerance so we currently hold no bonds. So this is more of a theoretical discussion which I why I posted it here.
From what I've read recently, I find the argument to "take your risk on the equity side" and therefore skip say corporate bonds and only hold treasuries of different types rather compelling. This makes me wonder, it seems like arguments on holding X at market cap are not nearly as often applied for bonds as equities, correct? (Don't find the needle, buy the haystack, etc. I don't know what will go up or down so buy the whole market, etc etc). Why not? I do kind of intuitively understand that stocks and bonds are fundamentally different so I'm not necessarily saying it is inconsistent, but I am open to arguments either direction.
If different types of bonds should be held at market cap, where is the line? Should the percentage of stocks vs bonds in your portfolio be based on what percentage of the financial markets they make up? What about other financial products?
Thus if you hold by market value, the market value of bonds is as good a measure as the market value of stocks. It will fluctuate with interest rates (inverse to), default risk etc. It should fluctuate less than stocks, except in extreme circumstances.
If you are holding a fund or ETF of fixed income, and holding bonds directly is a specialist area. The latter is best done when you have a specific (nominal) liability at a certain date in the future -- you set the bond maturity as close to that as you can.
Otherwise you just hold a bond fund or ETF, and the price and hence value in your portfolio fluctuates. Easy to rebalance vis a vis equities. Much less likely to give you a taxable capital gain.
TIPS are rather more complicated but probably you don't need to worry about those until you are about 10 years from retirement. Then certainty of purchasing power starts to become a serious issue.
Statistics: Posted by Valuethinker — Tue Jan 02, 2024 3:31 am — Replies 3 — Views 236