james4beach:
"If you are doing your own bond portfolio, make sure that you roll along the yield curve by selling bonds that are 1-2 years from maturity, and reinvest them. This is part of the magic that lets bond funds post excellent results ... the key is to maintain a constant avg maturity, and roll over bonds once their YTM drops to nil."
This is a rolling down the yield curve strategy, correct me if I'm wrong. However, it's not a shifting maturity strategy, but instead keeps constant average maturity. By selling bonds, you are now exposed to price risk, unlike with a buy and hold strategy. But if bonds are 1-2 years from maturity, that risk is small. Also, there will be transactional costs in selling bonds, which would be avoided with a buy and hold strategy. For this strategy to work, you'd need relatively liquid bonds. An attractive feature of this is that some of the yield will be cap gains, and in a taxable account, that's important.
How does this compare to GICs? One feature of GICs is that if you shop around, you can do well, relative to bonds. A disadvantage is that you're limited to 5 year terms, if you want the government guarantee. But since I don't want to hold fixed income more than 5 years, that's fine with me. A second important disadvantage is the illiquidity of GICs. If you need liquid fixed income, riding the yield curve makes sense. But if liquidity isn't important, would you be better off shopping for GICs?
I'm thinking of how one could implement this strategy. You could set up a 5 year ladder, but sell each ladder when it's 1 year (or possibly 2 years) from maturity. My guess is that it would work best with government of Canada bonds. I don't know about agency or provincial bonds.
One problem with this strategy is that it assumes a positive yield curve, which is usually but not always true. DFA has a somewhat similar strategy, except maturity is not kept constant. Maturity shifts, and will be extended, but only if if the longer maturity has at least 20 bp more per annum. In other words, the yield curve must be sufficiently positive. It is interesting to note that in the last edition of Hank Cunningham's book on bonds, he basically endorses DFA's strategy.
I like this strategy, as it helps deal with the negative expected return of fixed income in a taxable account. I would be interested in articles/research on this strategy.
Edited to include the following. In this strategy, you sell the bond, when the YTM is zero. There is interest remaining on the bond. But there's a capital gain on the bond, which if the bond is held to maturity, will be lost. So you sell the bond and take the capital gain instead of holding and getting the interest. So you'll get taxed on cap gains instead of interest, which cuts the taxation in half. OTOH, you'll have the transactional costs of selling the bond, which will decrease total return.