Running my own bond fund, comparing to VAB - Page 10
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Thread: Running my own bond fund, comparing to VAB

  1. #91
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    ^ in real terms you can lose money in both HISA and AGG.


  2. #92
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    An enigmatic expression! I suppose by that you mean you can lose to inflation?
    joe

  3. #93
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    Quote Originally Posted by Joewho View Post
    question was really, whether an ETF, in my case, such as AGG in the States, could possibly loose money? I know that for the short term it can loose money. But, I believe, but am not sure, that your point is that with distributions that loss is overcome in the long term.
    Right, in nominal (not real) returns, when you hold AGG on the order of 10-15 years, your total return will be positive, virtually guaranteed. To see this, look at historical bond returns and you'll see that even during the very sharp rise in interest rates in the 70s-80s, bonds had a positive nominal return. Nobody "lost money".

    So the real debate we're having is not whether bonds will lose money in nominal terms, but whether they can perform well in real terms.

    I am not sure why i would invest in something that was going to lose me money when I could just keep it in a High interest savings account.
    Is your question, why invest in AGG or VAB which may suffer interim losses, when you can just keep it in a high interest savings account?

    Answer: because AGG or VAB will likely (on average) have a superior long term performance. The same way that a GIC ladder would have outperformed a savings account. Both GICs and bonds are the same kinds of vehicles.

    And in response to this point, people respond to me and say -- well not this time it won't. And I call that an attempt at market timing... people are trying to predict interest rates, the yield curve, and inflation rates.
    Last edited by james4beach; 2017-02-17 at 01:59 PM.

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  5. #94
    Senior Member Argonaut's Avatar
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    Quote Originally Posted by james4beach View Post
    What if I said to you: "I just refuse to accept a CAPE (Shiller PE) of 29 which virtually guarantees low stock returns while taking on the risk of a 30% to 80% capital loss".
    Shiller PE is just an academic construct, something that may or may not be correlated with market direction, the answer of which we can definitely call an unknown. The 1-3 year Canada bond yield is 0.76%, that is a known. The capital gain upside you calculated on your 3 year bond was a meager 2.69%, that is a known. Negative interest rates is just wacky-town, so I'll ignore them. There's just no reason for myself and others to accept these poor returns, that are completely known.

    Capital gain or loss of equities is unknown, but its maximum is unlimited and not capped like bonds. Aggregate dividend yield of a solid Canadian portfolio is about 4%, maybe a bit less nowadays. That is a known. There is always the possibility of a cut or suspension of dividend, but I would put that likelihood and impact (for high quality companies) about the same as bond default and call it a wash.

    If you add up all the knowns and unknowns, bonds are just really not attractive right now for many people. There may be a place for bonds in some portfolios but one has to know that they are committing themselves to poor or negative returns, something I'm not willing to do. A bit of cash provides some of the same benefits with less of the risks.

  6. #95
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    Quote Originally Posted by Argonaut View Post
    ......Aggregate dividend yield of a solid Canadian portfolio is about 4%, maybe a bit less nowadays. That is a known. There is always the possibility of a cut or suspension of dividend, but I would put that likelihood and impact (for high quality companies) about the same as bond default and call it a wash.

    If you add up all the knowns and unknowns, bonds are just really not attractive right now for many people. There may be a place for bonds in some portfolios but one has to know that they are committing themselves to poor or negative returns, something I'm not willing to do. A bit of cash provides some of the same benefits with less of the risks.
    If I look at a balanced Cdn portfolio, it might look like this:

    Cdn Equities = 50%
    Cdn GIC's = 42%
    Cdn Pref Shares = 5%
    Cdn Cash = 3%

    That's a healthy allocation to fixed income, either GIC's or bonds. Examine the expected low volatility assumptions below.

    Cdn Equities =~ 3.5% dividend yield plus 3.5% capital appreciation
    Cdn GIC's =~ 2.5%
    Cdn Pref Shares =~ 4.5% dividend yield with no capital appreciation
    Cdn Cash =~ 1%

    Do the math and the total return is a very low risk, low volatility 4.5% per year.

    I would think that this would be a lot better for most people than what you're suggesting. What are your thoughts?

    ltr

  7. #96
    Senior Member Argonaut's Avatar
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    I'm not suggesting anything. Maybe there are real humans behind your usernames, but for all I know I'm talking to a bunch of 1's and 0's in the matrix. I wouldn't give financial advice to someone I know nothing about. Just explaining to j4b why I personally don't see value in bonds at the present.

  8. #97
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    Quote Originally Posted by Argonaut View Post
    I'm not suggesting anything. Maybe there are real humans behind your usernames, but for all I know I'm talking to a bunch of 1's and 0's in the matrix. I wouldn't give financial advice to someone I know nothing about. Just explaining to j4b why I personally don't see value in bonds at the present.
    Nice response. I'm out.

  9. #98
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    Quote Originally Posted by james4beach View Post
    And I call that an attempt at market timing... people are trying to predict interest rates, the yield curve, and inflation rates.
    Just like choosing an allocation and not wavering from it, I have trouble with those that talk about market timing as something that should be avoided at all costs!

    Being at the right place at the right time is something to hope/wish/strive for. Needs a certain amount of brainpower, intuition, luck? But as a famous golfer once said "the more I practice, the luckier I get" .

    For example right now markets 'seem' to be overvalued. Trump effect or whatever. Maybe it is a time to try to time the markets and move equities to cash or maybe even bonds? Or would that we unwise because it is an attempt to time the markets?

  10. #99
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    I completely understand the argument for why someone doesn't see anything attractive about bonds at present.

    Still the point I'd like to stress is that the "tactical asset allocation" kind of approach -- outsmarting the stock & bond markets -- tends to not work well in the long term. Personally I also wish I could tune my allocations such that I'm optimally exposed to stocks & bonds only at the right times, but from the studies I've seen, and personal experience, this doesn't work. Interest rates and inflation are no easier to predict than stock or commodity market direction.

    Quote Originally Posted by agent99 View Post
    Being at the right place at the right time is something to hope/wish/strive for. Needs a certain amount of brainpower, intuition, luck? ... Maybe it is a time to try to time the markets and move equities to cash or maybe even bonds? Or would that we unwise because it is an attempt to time the markets?
    I'd like to believe it's possible to intelligently adjust exposures like this, but I haven't been able to do it, and neither have the plethora of mutual funds. The studies on "tactical asset allocation" funds have also shown they are failures. Maybe you will be able to do it, but you'll be one of the very few who can.

    Basically I'm making the argument for couch potato indexing. The only wiggle room I leave myself for market timing is in the small allocation adjustments, but these are trimming activities and not sweeping changes to my strategy.
    Last edited by james4beach; 2017-02-17 at 06:36 PM.

  11. #100
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    James,
    I don't disagree that is hard to get market timing or allocation timing "right". For those who are working or heavily involved with other things, some sort of autopilot investing using some of those often espoused "rules" may be the right thing. But if you have time and do it in a way, that limits or avoids chance of a loss if you are wrong, then I see nothing wrong with trying. I am sure most managed funds and professional investors attempt to get timing/allocation right.


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