2017-02-17, 08:40 PM
One anecdote from me: I knew that stocks were overvalued in 2006-2007 and there were financial sector risks, so I (correctly) lightened up on stocks. This was market timing at its finest ... I avoided the 2008 catastrophe.
BUT after the turmoil, I failed to buy back in. Instead if I had been steadily invested in SPY & XIU, that would have done much better.
I similarly have tried to outsmart the bond market. Even in the early 2000s, I was limiting myself to 3 yr instruments thinking that interest rates would rise. I was wrong. Just like with my stock experience, I would have done much better if I just stayed consistently invested in the asset class.
2017-02-19, 10:56 AM
Above is a link to a video by Lars Kroijer. Basically, it's about indexing, which isn't relevant to this thread. But what is relevant is his approach to asset allocation. He advocates what some might call a barbell approach. The equity portion of the portfolio is indexed. But the rest of the portfolio is in cash or government bonds. It's his advocacy of cash for the nonequity portion of the portfolio that I find interesting.
From p. 95 of "Stocks For The Long Run", the following are the worst real returns from 1802-2012 for US bonds and bill over 1 ,2 and 5 year holding periods respectively: -21.9% vs. -15.6%, -15.9% vs -15.1% and -10.1% vs. -8.3%. What defines bonds is important, because a 5 year bond behaves quite differently than a 30 year bond. Nevertheless, if capital preservation is important, bills look like a reasonable option.
The following is only about products with CDIC backing. The top HISA is 2%. The top 1 year, 2 year and 5 year GICs are 1.75%, 1.95% and 2.50% respectively.
1 month Canadian treasury bills, 1 year Canadian Treasury bills, 2 year government of Canada bonds and 5 year government of Canada bonds are paying 0.44%, 0.60%, 0.79% and 1.18% respectively.
A province of Ontario bond maturing on March 8/2018 has a yield of 0.78%. Province of Quebec bonds maturing on December 1/17 and December 1/18 have yields of 0.70% and 1.00% respectively.
Enbridge Pipelines has a bond maturing on Nov 19/18 with a yield of 1.37%. Rogers Communications has a bond maturing on March 22/21 with a yield of 2.06%.
As mentioned previously, I see the role of cash/fixed income as a way to offset known and unknown liabilities for the next 3-5 years. A bond/GIC approach is a good way to meet that goal. But I'm becoming increasingly convinced that a HISA is a reasonable alternative to a bond/GIC strategy.
What strikes me is how simple it is. To become a fixed income expert takes a lot of time, and even if I wanted to spend the time, I'm not certain that I would succeed. But I think I can become an expert about Canadian HISAs, and it won't take that much time. And I doubt that I will significantly underperform strategies that are much more sophisticated.
Last edited by 0okm9ijn; 2017-02-19 at 02:26 PM.
2017-02-19, 06:37 PM
Let's look at a period where interest rates have actually gone up. On 2012-07-24 the govt 10yr was 1.58% and today it's 1.74%.
Originally Posted by 0okm9ijn
According to your thinking, the period from 2012-07-24 to 2017-02-17 should be a period where cash/HISA outperforms bonds. XBB annualized performance in this period was 2.51%.
Even at the sketchiest mortgage trust high interest savings accounts you could have found over that period, I don't think you would have outperformed in HISAs. Some of the very high rates we see today are promotional and from new subsidiaries of places that didn't even exist before. A place like Outlook Financial has been a long established top HISA yield. Over this period the average Outlook Financial HISA rate was 1.85%
So here is a period where interest rates went up -- just as you are fearing -- and XBB/VAB returned 2.51% vs about 1.85% in HISA. Personally I would be happier with the 2.51% from a static "set it and forget it" investment, vs constantly shuffling money between different sketchy mortgage lenders, opening endless new accounts, and catching promo rates.
I don't see how HISAs are less work, and they actually underperformed during this period where interest rates went up!
2017-02-19, 06:44 PM
You might say, well the 1.85% in HISA during that period wasn't too much worse than 2.51% in XBB -- and I agree, they both round to 2 more or less.
As far as predicting what's in store for the future,
1. bond yields go up gently -> VAB outperforms
2. bond yields go up sharply -> HISA outperforms
3. bond yields go down -> VAB outperforms
4. bond yields stay flat -> VAB outperforms
Personally when I look at that matrix of forecasts, I say to myself: the average case is that VAB outperforms. And holding VAB or XBB is much easier than jumping around between HISAs to get the best rates.
Last edited by james4beach; 2017-02-19 at 06:55 PM.
2017-02-19, 10:12 PM
The purpose of a HISA is to offset cash flow liabilities over the next 5 years. XBB has an average effective duration of 7.16 years; 10.75% of the fund is in BBB bonds. I wouldn't use XBB to offset cash flow liabilities over the next 5 years. With XBB, you're taking on interest rate risk and some credit risk. You should outperform a HISA. I'd prefer to take my risk in equities, rather than bonds, where it historically has been better rewarded. And that's ignoring posttax returns.
2017-02-19, 11:21 PM
I agree, if your goal is to have cash available over 5 years, HISA is the correct option -- not XBB/VAB. My time horizon is 10+ years so I feel VAB is appropriate for my fixed income. Separate from this, I also maintain a full 25% allocation to HISA & GICs.