This Vanguard article included an infographic (see below) that shows the growth of international bonds as an asset class. If you were to consider the world’s investable market as split between bonds and equities, internationally-issued bonds are now the largest piece of the pie at 35%. This includes both government and corporate bonds.

Vanguard believes that holding international bonds is an important way add diversification to your portfolio, and in mid-2013 added international bonds to their Target Date Retirement and LifeStrategy all-in-one mutual funds (currently 20% of the total bond allocation). The Vanguard Total International Bond Index Fund Investor Shares (VTIBX) has an 0.23% expense ratio. I’m still not convinced of their necessity and don’t own any foreign bonds. Back in 2000, international bonds were still 19% of the global market, yet they took up 0% (none) of their Target Retirement and LifeStrategy funds.

I previously wrote about how the Vanguard Balanced Index Fund was a good example of the benefits of holding both stocks and bonds in your portfolio. Now, I’d like to extend this and compare the Vanguard Balanced Index Fund (VBINX) with another veteran balanced fund, the Vanguard STAR Fund (VGSTX). They are similar yet different:

Here’s a chart of how $10,000 invested 10 years ago would have done. With the Vanguard STAR fund, you’d have $20,653 today. With the Vanguard Balanced Index fund, you’d have $19,749. (This is with Investor shares, which have a lower minimum investment than Admiral shares. The minimum used to a lot higher, but now it is $10,000 for Admiral shares.)

(click to enlarge)

My observations:

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The Vanguard REIT Index Fund provides low-cost, broad exposure to real estate investment trusts (REITs). It is available in mutual fund (VGSIX, VGSLX) and ETF shares (VNQ). A unique feature of this asset class is that to qualify as a REIT, a company must distribute at least 90 percent of its taxable income to its shareholders annually. This means that the income earned by this collection of commercial property (shopping malls, office buildings), self-storage companies, apartment complexes, and nursing homes is almost 100% spit out as dividends. (Note that REIT distributions don’t qualify for the preferred dividend tax rates).

I was curious as to what it would have been like to hold this fund and treat it like an income-producing rental property. Let’s say I bought it starting January 2000 and held it until today. I went on Yahoo Finance and looked up the historical distributions for VGSIX and added them up on an annual basis. Here’s what you would have earned per share:

As the share price in 2000 was about $10, you would have started with roughly an 8% annual yield. Based on that initial $10 number, your annual yield would have risen to nearly 12% in 2005 and dropped to 6% in 2010. Of course, the share price did vary over the entire period, with some big swings and ending up at over $20 today. On a total return basis (share appreciation plus dividends), this fund has shown significant volatility but has done quite well for those that held on:

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Mosaic is a new crowdfunding start-up allows investors to invest in clean energy projects with as little as $25. A solar power farm needs financing to get built. They sell the energy produced to customers like major utilities and then pay investors back. Mosaic takes a cut. Mosaic has recently been more projects since their debut (and sellout) earlier this year.

Below is a screenshot of an actual project with a 12-year horizon with expected 5.5% yield that is currently in funding – the one I was looking at yesterday already funded! If you live in California, you’re likely to be familiar with PG&E which made a 20-year agreement to purchase power from this project. On the production end, Panasonic is guaranteeing a minimum power production level for 12 years (or else they cover the difference). I’m not sure what the interest rates on these types of project would be on the open market, but right now Yahoo Finance shows the average yield on a AAA-rated 10-year corporate bond to be 3.60%.

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Yesterday, I posted a 9-month update on my $10,000 P2P lending portfolio with loans from Prosper and LendingClub. Every so often it is pointed out that lending unsecured money directly to random people at high interest is not very safe, and you could just invest in junk bonds from shakier companies instead.

“Junk” bonds, also known as High Yield bonds, are bonds from companies which have earned a credit rating from one of the major rating agencies that is worse than the “investment-grade” tier. Perhaps the company already has a lot of debt, or its balance sheet is otherwise worrisome. Bonds from some pretty big and well-known companies have been rated junk from time to time.

This is not a detailed analysis and not even technically an apples-to-apples comparison, but I ran some quick numbers to satisfy my own curiosity. The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) is the largest high yield US corporate bond ETF, with over $15 billion in assets and an expense ratio of 0.50%. Here’s a chart of the credit rating breakdown of the portfolio, taken from their latest Q2 2013 factsheet.

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