There is no magic that insurance companies can do to enhance long term returns on a bond portfolio, and given the costs involved most investors would be far better served to invest in a short-term, high quality bond index fund.
Mr. Bogle believes that a simple portfolio including only two funds, the Vanguard Total Stock Market Index Fund and Total Bond Market Index Fund would be sufficient for many investors.
FORBES: Vanguard Founder John C. Bogle -- In Person With The Bogleheads
Following this model, you could invest your funds in Vanguard Total Stock Market Index Fund and Vanguard Total Bond Market Index Fund.
To show this, I created and rebalanced several portfolios using the Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) and the Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX).
The Vanguard Total Bond Market Index Fund has a yield to maturity of 1.6%, scarcely enough to keep up with inflation.
Investors should expect this to be the total return from a U.S. total bond market index fund over the next 10 years.
Sticking only to investments of fairly low risk--say, Vanguard's Total Bond Market Index Fund, yielding 6.2% now--you can do much better than the 4% aftertax cost of a mortgage.
Carlson has delivered a 13% compound annual return since then, a percentage point better than the emerging market index and better than double what you would have earned from the collection of high-grade U.S. paper in the Vanguard Total Bond Market Index Fund .
If you put your whole bond portfolio into the Vanguard index fund, which is mostly in U.S. governments, you have a fairly low risk of default but a fairly high risk of not achieving a positive real return.
For example, the Lehman Aggregate Bond Index contains more than 6, 000 bonds, but the Barclays iShares Lehman Aggregate Bond Fund ( AGG) contains only a little more than 100 of those bonds.
One way I trim the fees charged by fund companies on my retirement accounts is to invest in a handful of stock and bond index funds, which carry expense ratios ranging from .05 percent to .16 percent.
If you are interested in index funds, it is likely that you own shares in a U.S. total bond market fund or ETF.
FORBES: Total Bond Index Funds are Not the Total Bond Market
One example, the iShares Global Inflation-Linked Bond Fund ( GTIP), seeks results that correspond to the BofA Merrill Lynch Global Diversified Inflation-Linked Index.
And his ten-year-old Deutsche Municipal Bond Fund did 7.26%, versus 5.98% for the Lehman Five Year General Obligation Index, putting it in the top 4% of its class.
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