# TDB909 - Above Average Risk?



## Simon Says (Jan 5, 2013)

This bond index is listed as above average risk, as a new investor this doesn't make sense to me. Wouldn't a bond index primarily made up of gov't bonds be about as safe as it gets? While I see the US index is listed as below average risk?

Doesn't make sense to me, if anyone could explain I'd appreciate it.

Thanks,

Si


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## Dibs (May 26, 2011)

Where is it listed as above average risk?


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## Simon Says (Jan 5, 2013)

Dibs said:


> Where is it listed as above average risk?


Morning Star and google finance references morning star as well:

https://www.google.ca/finance?cid=862070478473117

It's on the right about half way down.


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## Synergy (Mar 18, 2013)

Could this have something to do with a potential rising rate environment? I sold my TDB909 holdings back in April or March - currently bond-less. According to WebBroker at TDW the fund is rated as a 4/5 - Overall (Morningstar), but in the short term (3-5 yrs) it rated as a 3/4. I'm not sure why it's viewed as above average risk while it retains a 4/5 rating?


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## brad (May 22, 2009)

You can lose principal in a bond fund if you don't hold it for at least its average duration; that might be the risk they're talking about. See http://canadiancouchpotato.com/2011/07/07/holding-your-bond-fund-for-the-duration/


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## Simon Says (Jan 5, 2013)

brad said:


> You can lose principal in a bond fund if you don't hold it for at least its average duration; that might be the risk they're talking about. See http://canadiancouchpotato.com/2011/07/07/holding-your-bond-fund-for-the-duration/


Thank you all for your comments.


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## warp (Sep 4, 2010)

As interest rates rise, ( if they ever do), prices for existing bonds, and bond funds will drop, causing you a capital loss greater than what the fund is paying you in intersst payments. This is why the funds are not safe at all.

If you own individual bonds, you cen hold them to maturity. Funds have no maturity date, so it is harder to do, and in effect you would need to hold on at least as long as the fund's "duration", though this does not always work in real life.

What owners of tehse bond funds also need to consider is that in this day and age of historically low interest rates, the fees that the funds charge can eat up a large part of your interest payments......and all this can result in an almost sure loss for investors when taking inflation into account.

You might consider dividend paying stocks, that have a history of rasing their divs, as an alternative, and probably better, and "safer", investment. There are several such ETF's in Canada.

Good luck.


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## Simon Says (Jan 5, 2013)

warp said:


> As interest rates rise, ( if they ever do), prices for existing bonds, and bond funds will drop, causing you a capital loss greater than what the fund is paying you in intersst payments. This is why the funds are not safe at all.
> 
> If you own individual bonds, you cen hold them to maturity. Funds have no maturity date, so it is harder to do, and in effect you would need to hold on at least as long as the fund's "duration", though this does not always work in real life.
> 
> ...


What's confusing to me is that I always thought bonds were safe and during the 2008 economic down turn bonds did well when nothing else did. I've read the money sense perfect portfolio and I thought they used bonds to reduce the risk in the portfolio but I also thought that bonds typically act oppositely to stocks, so when markets are up then bonds are down and vice versa. I could be completely wrong since I am just learning all this stuff, but if bonds are risky and index funds are somewhat risky then really should this configuration be used in and RSP? I was planning to invest in this stock fund at a percentage similar to my age (per the old rule of thumb).

Please correct me if I'm wrong.

Si


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## brad (May 22, 2009)

Simon Says said:


> What's confusing to me is that I always thought bonds were safe and during the 2008 economic down turn bonds did well when nothing else did. I've read the money sense perfect portfolio and I thought they used bonds to reduce the risk in the portfolio but I also thought that bonds typically act oppositely to stocks, so when markets are up then bonds are down and vice versa.


This is generally true, but with an important distinction: we're talking about GOVERNMENT bonds here, not corporate bonds. In general (but not always), government bonds are weakly correlated with stocks, which is why many people with balanced portfolios of stocks and bond funds saw their portfolios' values increase in 2008.

Nothing's a sure thing, and you can find cases where stocks and government bonds both tumbled together, but as a general rule this weak correlation tends to hold. 

Bond funds are "safe" if you hold them for the duration, although as warp points out the fees charged by those funds tend to wipe out a good chunk of whatever gains you have at today's low interest rates. But bond funds aren't in your portfolio to make money. They're in your portfolio as a hedge against volatility.

They may not be the most optimal hedge, but they're probably the most expedient since it's easier to buy and sell shares of bond funds to rebalance your porfolio than it is to sell, say, GICs, since you pay a penalty on GICs if you withdraw before their maturity date.

I suppose dividend paying stocks are an option, but I've never been convinced that you really come out ahead with those, since they're trading growth for dividends.


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## warp (Sep 4, 2010)

Persoanlly I have put some of my cash/bond allocation into several high interest savings accounts. The return is lousy but as Brad pointed out this money is the "safe" part of a portfolio.

Unitl recently I would purchase individual Corporate bonds, and the tields were from fair to good, depending on the company. These days interest rates are so feeble on any investment grade corp bonds that buying them seems futile to me.

You could buy some junk bond ETF's to pick up yield..( with a small portion of your portfolio)... or look at some convertible debentures, but would advise that you learn much more about them than you seem to know now, first. I always try to keep in mind, that in the open marketplace, I am competing with professionals who probably have a better understanding of these products than I do.

good luck

good luck


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## GoldStone (Mar 6, 2011)

Morningstar puts this fund in the Canadian Fixed Income category. When they say it's "Above Average Risk", what they really mean is that this fund is more volatile than an average fund in the Canadian Fixed Income category. They use volatility as a proxy for risk. That's really not very useful.

I'm sure that Canadian Fixed Income category includes many funds with a shorter duration than TDB909. Naturally, they are less volatile than TDB909. Duration is a measure of interest rate sensitivity. Longer duration funds are more volatile. Shorter duration funds are less volatile.

I think you can safely ignore the risk label. Compare other factors when picking a bond fund:

- composition of the bond basket (weight of the government bonds vs. provincial bonds vs. corporate bonds)
- weighted average term
- weighted average duration
- weighted average yield to maturity
- MER


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