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Vanguard Short-Term Treasury Message Board

  • xmadisonian xmadisonian Jul 15, 2008 8:19 PM Flag

    Why buy this fund?

    Why buy this fund? Wouldn't it be better to buy TIPS fund?

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    • Low correlation with equities market. Check out a chart of S&P 500 vs. VFISX during the last two market crashes (including the current one). Investors take a "flight to safety" when it hits the fan. This fund is the safest of the safe- short duration = low interest rate sensitivity and low volatility (risk, as measured by standard deviation, very low with this one). This is what we call "bubble protection"-- use this as a part of your portfolio to make it more efficient (100% equities isn't efficient, beyond a certain percentage of one asset class you are not rewarded as well with additional exposure to it, even if it does perform better historically--check out "Efficient Frontier" on if you were to include this fund in an equity-heavy portfolio (which you should have if you're a long-term investor), as you rebalance you will prevent yourself from riding the equities bubbles all the way up-- and all the way down. Thus, you could lower your portfolio's overall standard deviation (risk) and actually increase your returns (you take money off the table automatically when equities are on a roll). Combine this fund with TIPS (Vanguard's VIPSX) and you have a rock-solid fixed-income portion of your portfolio with zero default risk. These two asset classes actually have low correlation to each other as well (some argue TIPS are an asset class of their own and not bonds). Additionally, you want to take risk in your equities and maintain safety in your fixed income-- this is because risk is rewarded more efficiently in equities and not so efficiently in fixed income (a lot more risk = only slightly more return in fixed income). Not to mention the duration is solid: Dollar-cost average into this fund as well as your equities, rebalance annually. I recommend 10% minimum VFISX, depending on your age.

    • Not in a period of deflation.

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