# Dalio says: "Don't own bonds."



## MarcoE

Two weeks ago, Ray Dalio did an interview on Bloomberg.

Dalio emphatically said: "Don't own bonds. And don't own cash."

What do you think? With yields so low, are you buying bonds these days?

You can watch the clip here: Ray Dalio on Bloomberg


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## AltaRed

Bonds are not essential but cash, or cash equivalent, reserves are required. Maybe 6 months Emergency Fund for those still working and accumulating, and 2-5 years for those in withdrawal. How one accomplishes that will vary by person.

Added: I am not buying any new bonds except that which comes with MAW104 when I buy my TFSA contribution limit each year and fund my granddaughter's RESP.


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## OneSeat

AltaRed said:


> Bonds are not essential ................................


Reading that literally it is obviously true but were you in any way suggesting that in your mind they are not really recommended? - except for the 6 month to 2 year "safety buffer". In other words 90% or so all in stocks of
various types? 

How do you reconcile that idea with Permanent Portfolios with 50% Bonds like J4B often explains and recommends?

If I consider myself average should I aim for an average between those extremes? I do understand different people have different ideas but I'd love to understand some a little better. Thanks.


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## AltaRed

No, I won't say they are NOT recommended. Only that there are substitutes for bonds, including GIC ladders and even plain old HISA accounts. Bond ETF Total Returns have done remarkably well this year as the yield curve collapsed but folks are looking longer term when a gradual return to improving yield curve provides headwinds to bond Total Returns.

So when I read stuff like 50% bonds, I interpret it as really meaning 50% fixed income. Just like one might cherry pick equity markets for the stock component, one can cherry pick fixed income. It may pay to go short (as in a ST bond ETF like XSB) or a GIC ladder or a 1.5% HISA from the likes of EQ Bank or LBC Digital. It may pay off over the next 5 years, or it may be that a medium term bond ETF blows the doors off trying to be cute. No one knows.

Not that it matters to anyone but me, but my fixed income is about 50% HISA (cash) and 50% 5 year bond/debenture/GIC ladder... the former of which is in my non-reg and the latter is in my RRIF. As of the moment, I am not renewing any maturing bonds/debentures/GICs into new 5 year offerings because I have decided I am not going to buy 5 year paper at 1.5% rates. In the interim, I will stay short in HISA cash, or more likely, I will roll over maturing securities into VCNS...which of course contains 40% equity. If/when fixed income yields return to something more reasonable, I can start to re-build my 5 year bond/GIC ladder by selling portions of my VCNS holding to re-build that ladder.


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## james4beach

Am I buying bonds? No, I'm already at my asset allocation's target weight [ details at end of post ] so I don't have any reason to buy bonds right now.

Dalio's advice isn't clear. In this video he says a person needs "currency diversification, *asset class diversification*". In every interview he gives, he reminds people to diversify between asset classes. Then in the same video he says "don't own bonds". Well he's contradicting himself, because bonds are one of the major asset classes.

IMO there are two Dalios. Let me call them Active Dalio and Passive Dalio.

His firm's actively managed Pure Alpha fund is having a very bad year, so maybe his thoughts on active management are not worth that much. At the time that article was written, performance was

+15% YTD for Passive Dalio ... this guy is 55% bonds (All Weather)
-19% YTD for Active Dalio ... the guy who appears on TV to help the hedge fund

So which Dalio should you listen to?



AltaRed said:


> So when I read stuff like 50% bonds, I interpret it as really meaning 50% fixed income.


I have 50% in fixed income, a mix of bonds and GICs, currently about half of each.

December is when I do my rebalancing, so if I'm too low on fixed income, I will buy more. Today I'm 50.6% fixed income, so there is no need to rebalance yet. If the year ends like this, I will not buy bonds because my asset allocation says I should not.



AltaRed said:


> Added: I am not buying any new bonds except that which comes with MAW104 when I buy my TFSA contribution limit each year and fund my granddaughter's RESP.


But under the hood, MAW104 *does* buy bonds when rebalancing calls for it. This year, Mawer likely will not rebalance into bonds (since stock & bond performance was similar for this year) but in the past, they clearly have bought bonds when asset allocation called for it. If they weren't buying bonds over the years, they would have been much higher than their current 61% stock weight.


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## AltaRed

Which is what I said... "that which comes with MAW104"

IF I buy more MAW104 units, and I will in Jan with my TFSA contribution, I will convert some cash to bonds and stocks. If/when MAW104 re-balances, it will buy or sell bonds as the case may be.


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## james4beach

Let's also not rule out that deflation is still a possibility. Fixed income at 1.3% yield today may not be such a bad idea with inflation at 0.7%.

QUESTION: was fixed income more attractive when it had a yield of 2.6% and with inflation at 2% ?

Ben Felix of PWL Capital posted an analysis a couple months ago in which he said that he believes that deflation is a greater concern than high inflation. So it's possible.

We don't know how the future will play out, and that's the idea behind asset class diversification, and it's why one should stick to the existing asset allocation technique (bonds and all) instead of second guessing it every few weeks.


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## AltaRed

I would change the word 'bonds' to 'fixed income' in your post. Fixed income is more generic and I think that is the better way to think about it. Heck... a bond could be 1 year to maturity or 10 years to maturity or ?. The only reason analysts, portfolio managers and talking heads use the word 'bonds' all the time is that institutional types don't buy things like GICs.


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## james4beach

AltaRed said:


> I would change the word 'bonds' to 'fixed income' in your post.


Made some edits to my last post, saying fixed income


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## OneSeat

I'm glad I asked a "simplistic" question because I got worthwhile responses from each of you - and useful ones - which largely agree with my own thoughts.

I wrote "bonds" because that is what Dalio said. I do have both Bonds and GICs - and HISAs I recently bought Hubert HISR at 1.5% and am about to buy some of their GICs at 1.6, 1.7, 1.8% - not exciting but acceptable in current circumstances. Those are in non-reg accounts. Some GIC's in my RIFs/TFSAs are still pulling in 3.2-4.4%.

My main concern right now is that I used most of my available RIF/TFSA cash last March (when stocks were low) and now that some GIC's are maturing I am loathe to buy at current prices (mainly US ETFs). I know that there are two different arguments there but I am pondering waiting for a dip before buying. In the meantime something like Red's VCNS makes more sense than more XBB or AGG.

Thanks both for your info. One question - I will be looking for a "safe" US ETF similar to VCNS - any immediate ideas? This is to keep my USD funds in USD.


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## james4beach

OneSeat said:


> My main concern right now is that I used most of my available RIF/TFSA cash last March (when stocks were low) and now that some GIC's are maturing I am loathe to buy at current prices (mainly US ETFs).


I'm not sure if you have a GIC ladder here, but if it is a ladder then the proper thing to do is buy another 5 year GIC



OneSeat said:


> Thanks both for your info. One question - I will be looking for a "safe" US ETF similar to VCNS - any immediate ideas? This is to keep my USD funds in USD.


AOM is the same kind of asset allocation ETF, with 60% fixed income, 40% stocks. There's also AOK which is even more conservative.


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## Just a Guy

The only idiots buying bonds right now are the bank of Canada. No foreign investors would touch them.


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## james4beach

Just a Guy said:


> The only idiots buying bonds right now are the bank of Canada. No foreign investors would touch them.


Incorrect, actually the polar opposite to what you said. There is very strong foreign purchases of Canadian bonds compared to previous years.

It turns out that the world is aggressively buying Canadian bonds. Probably because the world is starved for yields and Canadian bonds are some of the only bonds, especially in a stable first world country, that now have decent yields.



> Scotiabank says: There was a continued flight to Canadian bonds, as investors ramped up their purchases to CAD 68.1 bn (chart 6). This inflow was partially offset by CAD 20.6 bn withdrawn from Canadian equities.


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## dotnet_nerd

james4beach said:


> December is when I do my rebalancing, so if I'm too low on fixed income, I will buy more. Today I'm 50.6% fixed income, so there is no need to rebalance yet. If the year ends like this, I will not buy bonds because my asset allocation says I should not.


James, I'm puzzled by this. 

It's been a stellar year for stocks. In my portfolio the fixed income portion is underweight as a result. So I'll be buying more bond ETFs at yearend and likely for 2021 TFSA topups too.

I'm 20/20/20 : 40
Cdn/US/Global : Bonds


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## MarcoE

Is there anything in the current environment that you think makes GICs seem more appealing than bonds?


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## like_to_retire

MarcoE said:


> Is there anything in the current environment that you think makes GICs seem more appealing than bonds?


Yes, they pay more than bonds for similar guarantees. For this extra yield you give up liquidity.

ltr


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## MrMatt

like_to_retire said:


> Yes, they pay more than bonds for similar guarantees. For this extra yield you give up liquidity.
> 
> ltr


If you only have a 20% annual liquidity requirement, a 5yr GIC bond ladder is really easy to set up.


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## Just a Guy

james4beach said:


> Incorrect, actually the polar opposite to what you said. There is very strong foreign purchases of Canadian bonds compared to previous years.
> 
> It turns out that the world is aggressively buying Canadian bonds. Probably because the world is starved for yields and Canadian bonds are some of the only bonds, especially in a stable first world country, that now have decent yields.
> 
> 
> 
> View attachment 20895


James, you may want to check your own facts, as the bank is buying most of the debt in the secondary market to make it look like they aren’t buying the debt...to the point where we may not ba able to sustain it...









Bank of Canada already pushing limits of domestic bond market - BNN Bloomberg


Canada’s central bank is increasingly buying newly-issued government bonds that pay for pandemic spending.




www.bnnbloomberg.ca





not everyone is stupid enough to think negative yields is a good investment.


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## like_to_retire

MrMatt said:


> If you only have a 20% annual liquidity requirement, a 5yr GIC bond ladder is really easy to set up.


Of course, and if you need greater granularity you can have a 10 GIC ladder and get 10% every 6 months. That's what I have.

ltr


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## AltaRed

OneSeat said:


> My main concern right now is that I used most of my available RIF/TFSA cash last March (when stocks were low) and now that some GIC's are maturing I am loathe to buy at current prices (mainly US ETFs). I know that there are two different arguments there but I am pondering waiting for a dip before buying. In the meantime something like Red's VCNS makes more sense than more XBB or AGG.


Of course, if you do that, you will have an 'apparent' hole in your 5 year ladder for the period of time you are NOT rolling over 5 year money into new 5 year commitments. I say 'apparent' rather than 'actual' hole because you have to remember that VCNS or similar (with its 60% bond component) is the substitute for those 'years' you have not been rolling over. You would then tap into VCNS to plug those holes with 5 year money when it comes time to do so in the future. No one knows in advance whether this 'trick' will have positive or negative CAGR results except in hindsight, but my view* is 5 year money today @ 1.5% is too low to accept. Yields are only slightly better for A- or BBB+ bonds (which we know froze/crashed in March this year) and worse than GICs for government bonds....and government bonds are the only comparable equivalent to GICs.

What we don't know is whether global growth will really continue to recover post-pandemic (assuming the light is at the end of this tunnel with vaccines) like the indicators currently suggest, or whether this is a head fake and we are actually going to bounce off the bottom with negative interest rates and zero inflation and those 1.5% GICs will look absolutely delicious for a few years.

* I did roll over a maturing 5 year GIC in my RRIF this past summer @ 1.6% but it really torqued me to do so. I think VCNS is going to be that illegitimate child for awhile for me.


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## agent99

What type of bonds? Government bonds? Corporate bonds? Short term bonds? Long term bonds? Bond funds? Cash as in Hard currency, GICs, very short term bonds/coupons?

Discussing all of those as one entity doesn't make sense.

I still have about 20 corporate bonds and maybe a dozen GICs. But almost all bought when yields were over 3%.

Not buying any more now. When bonds/GICs mature, they temporarily become cash in our account. In deploying, I don't try and stick to some theoretical plan, like a specific FI/Eq ratio or a hole in a ladder that has to be filled, regardless. I try to make a decision on how that money can best serve us. That _has_ been more difficult lately.

Lately, some put aside in savings a/c for next years taxes, quite a lot has gone into various types of preferreds and some has been added to existing equity holdings. Cash flow has increased and our overall portfolio value is almost back to where it was pre-covid despite withdrawals for retirement living expenses.


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## Jimmy

Bonds had their run. The great bond bull market of the last 30 yrs really is over as we saw interest rates fall from 10% to .7%.

Not worth even looking at until yields rise to near 3% again. As I discussed w Agent99 in another thread, minimum rate reset preferreds may become the new bonds. They price recover almost instantaneously in crashes as they have a floor yield. Get your 4-5% return min or more as interest rates rise. Decent security unless you think the banks or companies like Broofkfield are going to have default issues. No muss no fuss.


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## agent99

Jimmy said:


> As I discussed w Agent99 in another thread, minimum rate reset preferreds may become the new bonds. They price recover almost instantaneously in crashes as they have a floor yield. Get your 4-5% return min or more as interest rates rise. Decent security unless you think the banks or companies like Broofkfield are going to have default issues. No muss no fuss.


Problem with min resets, is that there are only about 40 available and almost half of those are issued by Brookfield companies. 11 are pipelines, mostly Pembina. I don't think there are bank min resets? As a result, I have just 5 min resets out of 18 total pfds. Rate resets with high spreads are similar to min resets, but prices have crept up so always danger of them being called. Otherwise, perpetuals yielding over 5% are really like long term bonds and can be a substitute for long bonds - price may vary with interest rates, but the 5+% dividend on purchase price does not. If called, you get your $25 back (I try to buy below $25)

Pfds do seem to be only game in town if you want a decent yield in a fixed-income like investment. Fact that it is dividend income helps in unregistered accounts. But not straight forward - I first read as much as I could and initially only dipped toe in water in order to learn by doing.

Note: I am well into retirement, so what suits me, may not suit others.


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## AltaRed

In this long list of rate reset preferreds and sorting by credit rating, maybe half of them at most are Pfd2. Quite a few are bank ones, but some like LB and CWB are Pfd3.. Note this list is Feb 2020 so it is dated and some of them may have been called, especially any remaining bank ones that were non-NVCC compliant.

I suspect we will not see new issues for some time, or if they are, they will be replacing the 'minimum floor' ones.

Edit: Correction for wrong link....


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## OneSeat

AltaRed said:


> Of course, if you do that, you will have an 'apparent' hole in your 5 year ladder .......


You wouldn't even recognize mine as a ladder (!) it has so many inconsistencies due to when and how it was made - I'll handle that - already told my wife no new wardrobe in 2023.

My real plan is to duplicate the "profit" on the first house I bought 55 years ago - I bought it for 5000gbp - just sold again this week for 620,000gbp - 125x what I paid for it!!!! Actually I only got 8000gbp 52 years ago.




AltaRed said:


> No one knows in advance ......
> ....... whether global growth will really continue to recover post-pandemic ...............


I certainly agree with that. My overall attitude is make reasonable assumptions and take reasonable actions on those assumptions. So far over 30+ years it has worked out OK. No doubt others have done better, and others worse. And the sage advice one gets from you and others on this forum really helps. I'm thinking general advice but also occasionally specifics like your VCNS - I'd heard of it and dismissed it - never thought of using it as a stop-gap. Thanks.


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## AltaRed

In my case where I now have minimum annual withdrawals (MAW) from my RRIF, I would set aside my MAW from a maturing bond/GIC and re-invest the rest into VCNS. I can do this for 5 years tops until I have no more maturing bonds/GICs in my 5 year ladder. I then have to decide if I just stick with VCNS in my RRIF and fund my MAW from that, or whether I start to re-build my 5 year bond/GIC ladder somewhere along that continuim. 

The key thing for me to understand is I have the underlying 40% exposure present in VCNS in the meantime.


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## OneSeat

AltaRed said:


> The key thing for me to understand is I have the underlying 40% exposure present in VCNS in the meantime.


Ask J4B to find you a chart that proves whatever it is you want to prove - I'm sure he'll find you one.
(Sorry J4B - just a joke.)


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## fireseeker

AltaRed said:


> In this long list of rate reset preferreds and sorting by credit rating, maybe half of them at most are Pfd2. Quite a few are bank ones, but some like LB and CWB are Pfd3.. Note this list is Feb 2020 so it is dated and some of them may have been called, especially any remaining bank ones that were non-NVCC compliant.


I don't think the link is correct.


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## AltaRed

fireseeker said:


> I don't think the link is correct.


Oooops! You are right. Now corrected in post #24. Thank you for that observation.


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## fireseeker

Jimmy said:


> Bonds had their run. The great bond bull market of the last 30 yrs really is over as we saw interest rates fall from 10% to .7%.


There have been many, many voices over the last decade saying that bonds have had their day. Here is just one of those voices, from May 25, 2017:



Jimmy said:


> I just wanted to get a rough idea of the effect rising interest rates generally has on indexes and stock market valuations. In the US there will be likely a series of rate hikes over the next few years and what I am trying to do is estimate how much the rate hikes will eat into returns.


In the last three years, as rates continued to fall, XBB returned 5.24%.

So, I find it more helpful to assume the future is unknowable. As such, I try to stick with my AA and roll over maturing GICs.
Admittedly, this year will be the hardest ever. But the returns will still cover inflation. That has value.


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## agent99

AltaRed said:


> In this long list of rate reset preferreds and sorting by credit rating, maybe half of them at most are Pfd2. Quite a few are bank ones, but some like LB and CWB are Pfd3..


No doubt a long list of rate-reset preferreds will have varying credit ratings. 1/2 of them at pfd2 or higher seems quite good. A similar list of corporate bonds would also have varying credit ratings - more than likely worse!

Less than 1/2 of the min reset pfds I mentioned are rated at P2L or better. One of several reasons I only have 5 and have avoided Min Resets issued by Pembina, Altagas and Brookfield Properties.

Regarding credit ratings, Emera (P3H) has a Min Reset that I tried to buy. No real problem with P3 if the company is in what I perceive to be a stable business.


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## james4beach

dotnet_nerd said:


> James, I'm puzzled by this.
> 
> It's been a stellar year for stocks. In my portfolio the fixed income portion is underweight as a result. So I'll be buying more bond ETFs at yearend and likely for 2021 TFSA topups too.


Stellar year for stocks, yes, but also a stellar year for bonds. Stocks have only outperformed bonds by a little bit this year.

You were asking why I'm saying that I don't need to rebalance at the moment. I had a couple large inflows & outflows during the year and where I've landed is that I'm already at my target weight in bonds. I suppose it's a fluke of the timing of those other buys/sells I did during the year.

But even if you look at a standard 60/40, considering that year to date performance is
XAW (stocks), +10.4%
XBB (Cdn bonds), +7.5%

The result for these "typical" balanced funds is 60.6% stocks and 39.4% bonds, also not very far off target. It's because stock and bond performance was similar this year.


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## james4beach

I went for a long walk by the ocean yesterday and thought about bond pricing. I reminded myself of a couple things:

(1) bond prices are determined by the market. Yes there is a central bank influence, just like with equities, but the market still controls the price at the end of the day. If bonds were such an obviously terrible deal that offered terrible risk-vs-reward, all institutions on the planet would dump bonds. But _they are not dumping them_. *Nobody can force* institutions to stupidly buy overpriced securities. As I showed in post #13, global investors were net buyers of Canadian bonds this year. We've also seen net inflows into bond ETFs.

(2) based on the above, we can safely conclude that bond prices are not totally rigged, or stupid, but rather that some investors do think that Canadian bond prices (yields) offer a reasonable risk-vs-reward proposition. Some investors, but not all, believe that bond prices are OK here.

(3) complaints that bonds are terrible investments / huge bubble, have been around for a very long time

June 2011: "Piling into bonds now is a really bad idea", along with a misleading story of a 40 year bond bear market
August 2011: "Bad investments no sane person should make... terrible long-term choices"

But oops, it turns out that bonds were actually a perfectly good investment *even when those authors thought they were certainly terrible investments*. And here's a truly wild fact. Over the 9 years following the bond horror story articles above, Canadian bonds actually had the same performance as Canadian stocks. Here is the chart of XBB versus XIC, if you don't believe me.

And as you can see from that chart, at years #2, #3, and again at years #5, #6, bonds had outperformed stocks.

Think about this the next time you read an article about how bonds are terrible investments that are certain to lose. Nobody can predict the future. For all you know, if you fast forward 5 years, or 10 years, you might find that bonds have outperformed stocks.


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## dotnet_nerd

Thanks for both those posts James, very enlightening!


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## Just a Guy

As said before, given time, James will produce a chart to prove whatever hair-brained idea he has. He’s been working really hard to become sags jr. When it comes to dealing with reality. The reality’s still is the roi on bonds is still less than inflation and taxes, so for every dollar you invest in them you’ll have less than a dollar in spending power from them when you cash out. But at least it’s a guaranteed loss...

As I said before, keep drinking the koolaid, while the rest of us actually make money.


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## AltaRed

dotnet_nerd said:


> Thanks for both those posts James, very enlightening!


+1 The important thing is bringing some balance and perspective to herd opinion, etc. It may well be bond ETFs will perform poorly going forward with the headwinds they have with the yield curve, and that is simply opinion at this juncture as well, but bonds clearly have not been the disaster they have been made out to be this past decade. Food for thought.


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## OneSeat

Just a Guy said:


> As said before, given time, James will produce a chart to prove whatever hair-brained idea he has............


Might be more effective if you made your point more politely - - - - - - -


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## AltaRed

OneSeat said:


> Might be more effective if you made your point more politely - - - - - - -


Assuming you meant me, I edited that for more political correctness.


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## Covariance

In response to the initial comment regarding Mr Dalio. I recently heard him speak on this topic and the point he was making, among others, was one of caution regarding bonds in portfolio construction in this low rate era. Specifically that when the bond's YTM is so low a small rate change of say 50basis points (from lets say 1.5 to 2.0%) drives a large percent change in the price of the bond (long treasuries). Eg if bond's duration is 15 with a YTM of 1.5% a 50basis point move in the YTM changes the bond's price by 7.5% The price move is larger than the annual yield income. Extending this thinking to smaller moves in yields the volatility of the bond's price on any given day can be more or less the annual yield income.


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## MrBlackhill

First, I'll reply to the title of this thread.

Dalio says : Diversify, diversify, diversify. He also talks a lot about geographic diversification and the rise of China. He has a lot of China exposure.
Buffet says : Nothing can stop America when you get right down to it. Never bet against America.

So, what do we do? We read more, learn more, talk with more people and make our own opinion.



james4beach said:


> I went for a long walk by the ocean yesterday and thought about bond pricing. I reminded myself of a couple things:
> 
> (1) bond prices are determined by the market. Yes there is a central bank influence, just like with equities, but the market still controls the price at the end of the day. If bonds were such an obviously terrible deal that offered terrible risk-vs-reward, all institutions on the planet would dump bonds. But _they are not dumping them_. *Nobody can force* institutions to stupidly buy overpriced securities. As I showed in post #13, global investors were net buyers of Canadian bonds this year. We've also seen net inflows into bond ETFs.
> 
> (2) based on the above, we can safely conclude that bond prices are not totally rigged, or stupid, but rather that some investors do think that Canadian bond prices (yields) offer a reasonable risk-vs-reward proposition. Some investors, but not all, believe that bond prices are OK here.
> 
> (3) complaints that bonds are terrible investments / huge bubble, have been around for a very long time
> 
> June 2011: "Piling into bonds now is a really bad idea", along with a misleading story of a 40 year bond bear market
> August 2011: "Bad investments no sane person should make... terrible long-term choices"
> 
> But oops, it turns out that bonds were actually a perfectly good investment *even when those authors thought they were certainly terrible investments*. And here's a truly wild fact. Over the 9 years following the bond horror story articles above, Canadian bonds actually had the same performance as Canadian stocks. Here is the chart of XBB versus XIC, if you don't believe me.
> 
> And as you can see from that chart, at years #2, #3, and again at years #5, #6, bonds had outperformed stocks.
> 
> Think about this the next time you read an article about how bonds are terrible investments that are certain to lose. Nobody can predict the future. For all you know, if you fast forward 5 years, or 10 years, you might find that bonds have outperformed stocks.
> 
> View attachment 20903


I'm sorry, I have to disagree about this graph. *Read below my conclusions at the end of this post.*

This would be a more complete picture. Someone investing in stocks will diversify, so here's XWD including at least all of the developed markets and not just the Canadian stocks. I'd like to have an example of internationally diversified bonds, but so far we mostly have ETFs aggregating Canadian bonds or US bonds. Anyways. The recent performance of BNDW (total world bonds) is pretty similar to XBB.TO so far.










And then this is the rolling returns from 2009 to 2020 for :

Portfolio 1 : XBB.TO
Portfolio 2 : XWD.TO
Portfolio 3 : XIC.TO
Even the *lowest return* of XWD on a short 5-year window was greater than the *highest return* on any window of XBB, even the 1-year window.















Backtest Portfolio Asset Allocation


Analyze and view backtested portfolio returns, risk characteristics, standard deviation, annual returns and rolling returns



www.portfoliovisualizer.com





Now, what about a longer timespan? I'll take the US Stock Market (Portfolio 1) against the US 10-year Treasury (Portfolio 2) from 1972 up to today. Stocks returns on average 3-4pp CAGR more than bonds. That's a huge difference after multiple years.

Another thing to note is that since the peak in 1985 for bond returns, it has been declining every year. Look at the rolling returns graphs for 3-year and 5-year. Meanwhile, the rolling return graphs for stocks are steadily around 11%, but with big holes when there's a crash.























Backtest Portfolio Asset Class Allocation


Analyze and view portfolio returns, sharpe ratio, standard deviation and rolling returns based on historical asset class returns and the given asset allocation



www.portfoliovisualizer.com





*So, what's the conclusion?

Stop comparing stocks and bonds in terms of performance.* In my own opinion, they are tools for different purposes. Stocks are used for growth. Bonds are used to mitigate risk and volatility. Stocks perform better _on average_ but the *spread* of their outcome is wider, therefore more uncertain. Bonds perform worse _on average_ but the *spread* of their outcome is thinner, therefore more stable. When you are *contributing* to your portfolio because you don't need that money, you may want more growth, therefore more stocks. When you are *withdrawing* from your portfolio because you need income, you may want to mitigate risk and volatility due to the sequence risk, therefore more bonds (and other solutions like GICs, HISA, cash, etc.). *Or not*, if the market is very bullish and there's no depression because the safe withdrawal rate for stocks is about 5% while it's about 4% for bonds at the 25th percentile and the very safest is 2% for stocks or 1% for bonds. You may also want more bonds if your *risk and volatility tolerance* is low.

That's my two cents, my interpretation and my understanding as a beginner.


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## james4beach

OneSeat said:


> Might be more effective if you made your point more politely - - - - - - -


He was also downright wrong about his claim that nobody (except the central bank) was buying bonds. It took me about 2 minutes of googling to find the data on foreign net inflows into bonds, showing strong global demand for Canadian bonds.

I don't mind reading Just A Guy's opinions but I think he sometimes pulls these opinions 'out of thin air', to put it politely. And @Just a Guy , you should at least start from a factual basis when making your investment decisions.

It's not my problem if people read my posts and don't like the facts that I show. The fact is that many commentators wrote, going back a decade, that bonds are a terrible investment. Another fact is that there is still strong demand in 2020 for Canadian bonds... more so than Canadian equities, actually! I pointed out all of this to show that just because some analyst thinks bonds are a terrible prospect, doesn't mean it's true.

As for where bonds may go from here... nobody knows. They could be strong, they could be weak. Both options are on the table, IMO. People have been surprised before.


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## james4beach

Covariance said:


> In response to the initial comment regarding Mr Dalio. I recently heard him speak on this topic and the point he was making, among others, was one of caution regarding bonds in portfolio construction in this low rate era. Specifically that when the bond's YTM is so low a small rate change of say 50basis points (from lets say 1.5 to 2.0%) drives a large percent change in the price of the bond (long treasuries). Eg if bond's duration is 15 with a YTM of 1.5% a 50basis point move in the YTM changes the bond's price by 7.5% The price move is larger than the annual yield income. Extending this thinking to smaller moves in yields the volatility of the bond's price on any given day can be more or less the annual yield income.


This is true. At today's very low rates, any changes in interest rates will cause more volatility in bond prices (and bond fund) prices. So we can expect bonds to be more volatile than they historically have been -- that's all true.

But volatility is also a different issue than long term returns. Bond ETFs can be volatile and also potentially produce good long term returns.


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## Just a Guy

James, if there is so much demand for Canadian debt, why does the bank of Canada hold so much of it?









Bank of Canada expected to buy $200-billion of debt as it embraces quantitative easing


Quantitative easing, or large-scale buying of assets, is now the policy measure favoured by the BoC to ease the economic impact of the coronavirus pandemic




www.theglobeandmail.com





not to mention my other article which says they were buying 5B/week. Guess you missed those on google.


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## james4beach

MrBlackhill said:


> *Stop comparing stocks and bonds in terms of performance.* In my own opinion, they are tools for different purposes. Stocks are used for growth. Bonds are used to mitigate risk and volatility. Stocks perform better _on average_ but the *spread* of their outcome is wider, therefore more uncertain. Bonds perform worse _on average_ but the *spread* of their outcome is thinner, therefore more stable . . .


All good points. They are indeed different vehicles... different beasts with different characteristics, useful for different purposes. And more valuable to some people than others, depending on their needs, whether they are accumulating or withdrawing, etc.

You're right, we should not get caught up on the raw performance aspect.

When these commentators make such strong statements about how bonds are bad investments, have no place in a portfolio, etc they are missing the point that these vehicles can have different purposes, and may be useful for some investors but absolutely useless to others.


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## james4beach

Here's a question for people who don't like the yields today on bond funds, so are staying in high interest savings or short term bonds and waiting for better conditions: under what conditions will you re-enter bonds and go back into things like XBB and VAB?

I ask this because I still don't understand why people dislike bonds today. In this old thread from three years ago, the XBB real yield back then was about 0.4% and now, today, the XBB real yield is 0.6%, actually higher!

People hated bonds three years ago, hated them two years ago, and hate them today. What exactly is the criteria for "getting back into bonds"?


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## like_to_retire

james4beach said:


> People hated bonds three years ago, hated them two years ago, and hate them today. What exactly is the criteria for "getting back into bonds"?


A change in attitude.

ltr


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## james4beach

More on Dalio. He recently had an interactive Q&A on Reddit. Here's also an article: Ray Dalio Sees ‘Flood of Money’ With Soaring Asset Prices

Nothing too groundbreaking here. He recommends diversification between asset classes. I don't know how to use Reddit so maybe I missed this, but did not see him say anything about a recommended asset allocation, or mention All Weather.


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## MrBlackhill

_There's a lot of the things I've written below that I'm not sure. I'm getting a grasp of how to invest in stocks, but I still have much the learn about how the economy works..._

I'll just drop this here for discussion, from Yardeni. I know people say it's flawed and it's highly criticized. I haven't fully made my mind about it as I found this yesterday.

I believe it's not a tool to predict any kind of crash, but it seems to give a clue of bubbles due to valuation issues. Obviously, it can't give a clue about the debt crisis of 2008 or the pandemic of 2020, or... Anyways, it's only about valuation. I also think it is misunderstood, as some people believe that the equilibrium means that bonds and stocks should have about the same returns, which is wrong. I also understand that comparing bonds yield to earnings yield is odd, since they aren't the same kind of metric.

I agree though about the pitfall with interests rate below 1%, that means the stock market with a P/E of 100 would still be considered undervalued, which is odd. I'd just say that it doesn't mean that a P/E of 100 is undervalued, but that interests rate are insanely low and we would want them to increase a bit, but in order for the interests rate to increase, people must start spending instead of keeping their money in cash and not stimulating the economy. Even if we print money, inflation will not increase as long as we don't spend it, but it can reduce the value of our currency. Printing money will bailout the market, so I guess it's a good thing to hold stocks?

I've also seen comments about Japan. Well, in 1990, when Japan crashed, it had a P/E ratio around 70, which means an earnings yield of about 1.4%. Meanwhile, their 10-year bonds yield were above 5%. Therefore, stocks were highly overvalued. Afterwards, around 2005 until now, their stocks are now considered undervalued when comparing earnings yield to 10-year bonds yield and their stock market is doing better.

In the US, seeing that stocks were overvalued starting around 1997, you would sure have missed the nice run up to 2000, but you would also have missed the run down when it crashed. In fact, someone investing $1000/year from 1997 to 2001 would have made as much money in bonds than in S&P 500.

Even though the Shiller PE ratio is very high, the bond yields are extremely low. I mean, what do you do with your asset allocation for a growth portfolio when interests rate are so low? If you want to reduce your volatility and risk, that's fine. But otherwise? Central banks control the inflation and the debt by decreasing or increasing the interests rate. When they hit zero, they can't stimulate the economy anymore. Solutions are then to either decrease the spending, debt restructuration or wealth redistribution which all cause deflation due to the reduction of money flow. Another option is to print money which causes inflation. In normal times, they find an equilibrium between those measures, but now all what's left is to print money. And what happens with that money? They buy financial assets, which helps the stock market. Other than that, they buy government bonds. Government also looks for strategies to redistribute money fairly.

_Not sure if my understanding is all good, please correct me if I'm wrong or just provide your personal opinion about all this._


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## agent99

MrBlackhill said:


> _There's a lot of the things I've written below that I'm not sure. I'm getting a grasp of how to invest in stocks, but I still have much the learn about how the economy works..._


No comments, but I did watch the first video and part of the second one. I also found the originalfull Ray Dalio interview about the changing World Order. Same but without all the editorial comments.


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## MrBlackhill

agent99 said:


> I also found the originalfull Ray Dalio interview about the changing World Order.


Yes, I've seen the full interview, but thanks for posting. I was talking about it here : Ray Dalio's Changing World Order

Very interesting. I would like to have time to read about his studies.

He's currently very present and trying to pass along all of his knowledge. His YouTube videos are translated into multiple languages, he's writing free articles on LinkedIn, he's present on the social medias. I appreciate his work so far.


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## latebuyer

I thought i'd post something morgan housel said in the recent rational reminder podcast

So I think it's important to shift our expectations from something that generated wealth to you towards what I think is the real purpose of bonds, which is providing an airbag to your psychology to make sure that you do not get scared out of the stocks that you do own. So if you have a 60/40 portfolio, the 40% that you have in bonds, the sole purpose of that is to make sure that you can leave the 60% you have in stocks alone. That's its purpose. That you don't get scared out, that you don't get pushed out financially or psychologically. And that's a really important part of a portfolio.

I only have a small portion of my portfolio in bonds but i didn't see this viewpoint presented. Yes it was pretty horrible when i renewed my 5 year gic ladder at 1.56%.


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## agent99

latebuyer said:


> I thought i'd post something morgan housel said in the recent rational reminder podcast
> 
> So I think it's important to shift our expectations from something that generated wealth to you towards what I think is the real purpose of bonds, which is providing an airbag to your psychology to make sure that you do not get scared out of the stocks that you do own. So if you have a 60/40 portfolio, the 40% that you have in bonds, the sole purpose of that is to make sure that you can leave the 60% you have in stocks alone. That's its purpose. That you don't get scared out, that you don't get pushed out financially or psychologically. And that's a really important part of a portfolio.
> 
> I only have a small portion of my portfolio in bonds but i didn't see this viewpoint presented. Yes it was pretty horrible when i renewed my 5 year gic ladder at 1.56%.


Altared and others here do at times talk of fixed income in that context. He calls it ROC - Return OF Capital. 

I consider the ~40% we have in fixed income the same way, but I try to get a REAL return on our fixed income. In other words, a Return Of Inflation Adjusted Capital (ROIAC?  ) That would require us to know what our personal inflation rate will be. The Bank of Canada target is 2%, so we try to do better than that. In short term it is hard to know if 1.56% for 5 years will provide a real return, but It may.

I like the air bag analogy!


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## james4beach

latebuyer said:


> So I think it's important to shift our expectations from something that generated wealth to you towards what I think is the real purpose of bonds, which is providing an airbag to your psychology to make sure that you do not get scared out of the stocks that you do own.


I agree that this is one reason bonds are valuable in a portfolio. I have talked about this too; in this post I listed some valuable things about bonds / GICs:









It’s time for retirees to get out of bonds


All that 'age in bonds' stuff was born in an age much different than we are in today...when bonds delivered real returns and the equity risk premium was just 1-2% or so. Attempts to tweak it with 110-age in equities, or in later years with 120-age, was/is just a lazy, lame attempt to justify...




www.canadianmoneyforum.com





There are many advantages of fixed income. Reducing volatility is one of them, but also having the ability to withdraw cash when stocks are down. These various perks exist whether bonds yield 6% or 1%.

As I wrote in that other thread: I don't buy the argument that anything has changed.


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## Eder

If the sole reason to own 40% bonds is that you don't sell your 60% equities in a downturn then you're doing it wrong.


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## Investor87

james4beach said:


> I agree that this is one reason bonds are valuable in a portfolio. I have talked about this too; in this post I listed some valuable things about bonds / GICs:
> 
> 
> 
> 
> 
> 
> 
> 
> 
> It’s time for retirees to get out of bonds
> 
> 
> All that 'age in bonds' stuff was born in an age much different than we are in today...when bonds delivered real returns and the equity risk premium was just 1-2% or so. Attempts to tweak it with 110-age in equities, or in later years with 120-age, was/is just a lazy, lame attempt to justify...
> 
> 
> 
> 
> www.canadianmoneyforum.com
> 
> 
> 
> 
> 
> There are many advantages of fixed income. Reducing volatility is one of them, but also having the ability to withdraw cash when stocks are down. These various perks exist whether bonds yield 6% or 1%.
> 
> As I wrote in that other thread: I don't buy the argument that anything has changed.


What is your go to Canadian bond ETF?


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## Just a Guy

Funny how the same people promoting bonds are also those endorsing the redistribution of wealth. Coincidence? Many of them also claim, they “don’t want to be rich”. Guess because they want to take it from others.


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## AltaRed

Eder said:


> If the sole reason to own 40% bonds is that you don't sell your 60% equities in a downturn then you're doing it wrong.


The primary reason to have fixed income (bonds in this case) is to re-balance back to one's asset allocation when one side of the equation goes off the rails, particularly during accumulation 

That is an entirely different context/strategy than having a cash reserve for a retiree in withdrawal stage to stick handle through an equity crisis.


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## latebuyer

Just a Guy said:


> Funny how the same people promoting bonds are also those endorsing the redistribution of wealth. Coincidence? Many of them also claim, they “don’t want to be rich”. Guess because they want to take it from others.


You're funny. I said i hold a small amount of bonds and i'm somehow promoting them. Hilarious. Bonds may be important to new investors though. I started investing in 2008 and td monthly income saved my bacon because it had a lot of bonds in it and bounced back quickly. I think if it weren't for that fund i'd be sitting all in gics right now.


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## MrBlackhill

Just a Guy said:


> Funny how the same people promoting bonds are also those endorsing the redistribution of wealth. Coincidence? Many of them also claim, they “don’t want to be rich”. Guess because they want to take it from others.


You really can't stop trash-talking at people. Do you know one of the many things more important than learning how to make money? Learning to be civilized.

You can have your opinion about bonds. You can have your opinion about the distribution of wealth. You can have your opinion about the concept of equal opportunity. You can disagree to other people's opinion. But you should be open to the different opinions and you should articulate your beliefs in a constructive and civilized argument. Otherwise, you are just losing your credibility, but that's your right.


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## Just a Guy

Must have hit close to the bone...I just made an observation, you took it personally. Conscious tugging at you?


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## james4beach

Investor87 said:


> What is your go to Canadian bond ETF?


I hold XBB in my RRSP as part of my asset allocation.

But I think VAB is just as good and wouldn't mind holding it. In a non registered account, ZDB is best due to tax efficiency.

I consider the XBB a long term position and I have a 20+ year time horizon. There could be volatility in the < 10 yr time frame.


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## dcris07

ZAG is a great solution to hold for long term, this ETF replicates the Canadian universe Bond index, and MER is lowest in the industry i believe coming in at 0.08% , great way to diversify as well, holds mainly AAA, AA and A bonds but you also get about 12 % in BBB. I suggest you guys take a look its one on the most largest as well, which mean asset managers are using it


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## Investor87

james4beach said:


> I hold XBB in my RRSP as part of my asset allocation.
> 
> But I think VAB is just as good and wouldn't mind holding it. In a non registered account, ZDB is best due to tax efficiency.
> 
> I consider the XBB a long term position and I have a 20+ year time horizon. There could be volatility in the < 10 yr time frame.


I agree that XBB and VAB are quite similar, was not aware of ZDB, thanks for bringing it up to my attention. Since my horizon is 20+ years as well, I don't have much fixed income in RRSP, but in my open account it makes sense to weather short-term volatility.


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## james4beach

Bond prices are dropping dramatically. In terms of unit price alone (excluding interest payments), VAB is down 4.7% from its peak last summer. Long term government bonds ZFL are down 13.9% from their peak. Of course for total returns, you should consider distributions as well.

What do people think... is anyone planning to get out of bonds? Maybe the market is finally expecting higher inflation, and perhaps bonds will continue to decline.

On the plus side, interest rates have been going up. The yield to maturity of XBB is now over 1.4%, significantly better than cash and also higher than just about every HISA that's available.


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## Covariance

james4beach said:


> What do people think... is anyone planning to get out of bonds? Maybe the market is finally expecting higher inflation, and perhaps bonds will continue to decline.


Not out of bonds, however, I reduced portfolio duration last fall and have no immediate expectation of changing. I am, however, long corporate credit spreads.


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## OneSeat

Was 50/50 XBB/XSB till last month.
Now just XSB at 2.05% yield. Will monitor both.

Next week's question is GIC Ladder purchase at 1.70% or more XSB.
On USD side will probably buy more ISTB instead of 0.70% GIC.

Also will probably swap most HISA funds for XSB.


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## james4beach

OneSeat said:


> Was 50/50 XBB/XSB till last month.
> Now just XSB at 2.05% yield. Will monitor both.


So you've sold all XBB? Do you have some criteria in mind for when to get back in?


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## OneSeat

james4beach said:


> ................Do you have some criteria in mind.................?


"will monitor both" - I don't work to fixed criteria.
To me XSB is a halfway house between a secure capital GIC and a realtively turbulent XBB.
And has an acceptable current yield.


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## Covariance

I prefer a ladder to long duration ETF in this environment of potential yield increases, especially at the long end. With a ladder I know I have a complete return of principal and yield to maturity as long as I hold to maturity. With the bond ETF they are are continually selling bonds with the passage of time to maintain their maturity benchmark. The extent to which these are sold at a loss is a head wind. Until income return and reinvestment return pick up I am uncomfortable with this risk. Thus I will revisit as the new bonds they are putting into the long end of the ETF pull up weighted average coupon yield, and the weighted average YTM.


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## Argonaut

I wouldn't necessarily "get out" of Bonds based on the price action. But just have a proper asset allocation that you stick to... based on all factors including your own risk/goals, and attractiveness of interest rates.

That being said, I have a zero weighting in Bonds for my wife and I, and a 10% weighting for my kids' RESP (as part of 20% Bonds & Cash).

By the way, choosing between XBB, VAB, and ZAG is really splitting hairs. They're essentially the same, and it'll matter way more what your Bonds% allocation is than what ETF you choose. Here's a chart:










But I know, splitting hairs is fun for hardcore investing enthusiasts including myself!


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## MrBlackhill

Argonaut said:


> But I know, splitting hairs is fun for hardcore investing enthusiasts including myself!


Last time I've split hairs when comparing ZAG, XBB, VAB, I concluded that ZAG was the best. Lowest MER and best performer on the long run. BMO is giving a serious competition to iShares and Vanguard.

But we're certainly talking of no more than a few hundred dollars difference after 10 years, no matter how big is your position...


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## james4beach

I bought more XBB today. For long term accumulation, it's good to buy assets when they are depressed.

Splitting hairs on the specific funds, I agree.


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## AltaRed

I see another 5+% haircut coming with the likes of XBB. I don't think the steepening of the yield curve in the 7+yr bond market is over. Once that has adjusted, next up will be the 5 yr bond market and XSB will go through its pain. Are we having fun yet?


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## Jimmy

I agree. No pt getting clobbered 10% for every 1% rise in interest rates unless you are in retirement and pulling the $ out anyway. You don't see anyone on BNN or in the Globe recommending XBB or ZAG anymore.


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## james4beach

AltaRed said:


> I see another 5+% haircut coming with the likes of XBB. I don't think the steepening of the yield curve in the 7+yr bond market is over. Once that has adjusted, next up will be the 5 yr bond market and XSB will go through its pain. Are we having fun yet?


Possibly, but interest rates and the shape of the yield curve are notoriously hard to predict.

If XBB keeps falling (interest rates keep rising) the borrowing costs on corporations will become tremendous, and stocks will crack, and start plunging.

In a rising rate environment, stocks are riskier than bonds. I don't mind buying XBB as bonds decline. Do you know that XBB now has a higher yield to maturity than most of the best HISAs in the country?

I should add, my time horizon for this holding is well over 15 years, so I don't really care about short term volatility. Money I need very soon is in a GIC ladder and is not impacted.


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## james4beach

AltaRed said:


> I don't think the steepening of the yield curve in the 7+yr bond market is over


The steepening in the yield curve has been significant, and a very nice change.

By this way, this enhances the returns of bond funds. A steep yield curve is exactly what you want. Short term price pain (volatility) of course, but it also means any maturing bonds get rolled over at significantly better yields.

Bond ETFs really work their magic when the yield curve is steep. I can't speak to how to perfectly time purchases into XSB or XBB, but if this steeper yield curve and higher interest rates are going to persist, buying *into* (not selling) the bond ETFs is the right move.


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## AltaRed

Agree on all counts in the longer term. There will be a point when there will be rotation out of stocks if bond yields become high enough. It will be a question of when, not if.....but I may not live long enough to see it. That train on the horizon appears to speed up as it gets closer.


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## Money172375

I did a bad job managing my kids RESPs. They have healthy balances but I neglected to de-risk them as they older. They’re now 17 and 15. they Were 100% in td dividend growth for all these years. I started to move into a bond fund last year when the markets recovered.

I know I should probably go into cash or gics but that means opening a new account or using a money market fund. The accounts are branch based mf accounts. I didn‘t watch them close enough or care about MERs until last year. Honestly, the last few years have been a blur....can’t believe how old they are. One account is about 40% equity still, the other is at 50%. I figure the last withdrawal will occur when they are 21 or 22....so time horizon is still 5-7 years out. Not sure what to do. I’d prefer sticking with branch based td funds, as I said, don’t want to get involved with new accounts and transfers. I recall RESP transfers being a disaster waiting to happen. Do I continue to move into cdn bond fund....or maybe their short term bond fund or ultra short term bond fund? I’m thinking I want to get down to 20% equity when they start university. I think while rates my rise, it will occur slowly. I felt like I was telling customers for 10 years that rates may rise ....and they never did.


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## james4beach

Money172375 said:


> Do I continue to move into cdn bond fund....or maybe their short term bond fund or ultra short term bond fund? I’m thinking I want to get down to 20% equity when they start university. I think while rates my rise, it will occur slowly. I felt like I was telling customers for 10 years that rates may rise ....and they never did.


Bond funds can be volatile. If there will be withdrawals from these accounts within the next 5 years, I think you'll want to go either into short term bonds, ultra short, or a GIC.

I don't know what funds are available to you in these accounts. A 'short term bond' fund is usually appropriate for 2-5 year horizons.


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## AltaRed

Think Money needs to go ultra-short (or MMF) for money needed for the upcoming 2021-2022 term, or the year thereafter. I don't see the point going too conservative, but I consider it important to include some 'space' between going to 'cash' and when the funds are needed. At this point, return ON investment is far less important than return OF investment. Don't reach!


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## james4beach

AltaRed said:


> Think Money needs to go ultra-short (or MMF) for money needed for the upcoming 2021-2022 term, or the year thereafter. I don't see the point going too conservative, but I consider it important to include some 'space' between going to 'cash' and when the funds are needed. At this point, return ON investment is far less important than return OF investment. Don't reach!


Good point. For money needed up to 2022, I agree with AltaRed. Maybe cash, money market fund, or something like that.

If you have a payment obligation coming up in 2 years, or 3 years, then you really should set aside cash for that...or maybe a GIC. Something that's guaranteed.

A rule of thumb might be, for any cash withdrawal you know is happening in less than 3 years, stick in ultra-short / cash / money market fund. Something that does not fluctuate in value.


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## dotnet_nerd

I'm sticking to my plan. I'll treat my ZAG holdings the same way as my stock ETFs. If they drop in value, I'm not going to worry. I'll rebalance and buy more.

That's one thing I learned over the years. Devise a plan and consistently STICK to it through thick and thin.

Dumping and running for cover isn't part of my plan.


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## AltaRed

That is fine for a longer term portfolio. It doesn't help for a RESP in which there is a hard wired withdrawal happening this coming Fall 2021 or 2022 which is what the recent discussion is (was?) about. Selecting duration in alignment with need (shorter than need) is important.


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## Covariance

[QUOTE="AltaRed... Selecting duration in alignment with need (shorter than need) is important.
[/QUOTE]
Agreed. This is really important. Especially for an RESP account that needs to be drawn down while they are in school.


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## hfp75

dotnet_nerd said:


> I'm sticking to my plan. I'll treat my ZAG holdings the same way as my stock ETFs. If they drop in value, I'm not going to worry. I'll rebalance and buy more.
> 
> That's one thing I learned over the years. Devise a plan and consistently STICK to it through thick and thin.
> 
> Dumping and running for cover isn't part of my plan.


I learned that last year, j4b has preached this over n over, even has his own story about trying to time markets, as we all do.

Plus, what if really there is no inflation and another recession and they go neg on rates.... my zag allocation is 20%, so I’ll just hang there...


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## james4beach

hfp75 said:


> I learned that last year, j4b has preached this over n over, even has his own story about trying to time markets, as we all do.


Thanks. Yeah, I think it's best to stick to an existing strategy. I am sticking with my asset allocation plan. Earlier in my investment life I was not very disciplined, so I have been working hard at keeping my focus on the plan.

The COVID crash was a good test of this. I'm happy that I was able to stick with my plan (on stocks/bonds/gold) without making any changes during that crash.

That doesn't mean it will be a smooth ride though. There definitely can be some volatility and pain along the way... we could see bonds decline for a couple years. I keep reminding myself that this is a long term game.

Related to the current bond market...

The short end of the curve isn't moving much at the moment. Between July and today, the government 5 year yield has gone up from 0.40% to 0.57% (so up 17 basis points)

Whereas the 10 year has gone from 0.55% to 1.12% (that's up 57 basis points) -- that's pretty huge.

As I understand it, GIC rates would be tied to the 5 year bond. I guess this explains why GIC rates are not increasing, yet. But in the last couple days, the 5 year bond yield has started moving a bit more... maybe this means that GIC rates will go higher soon?


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## Covariance

james4beach said:


> Related to the current bond market...
> 
> The short end of the curve isn't moving much at the moment. Between July and today, the government 5 year yield has gone up from 0.40% to 0.57% (so up 17 basis points)
> 
> Whereas the 10 year has gone from 0.55% to 1.12% (that's up 57 basis points) -- that's pretty huge.
> 
> As I understand it, GIC rates would be tied to the 5 year bond. I guess this explains why GIC rates are not increasing, yet. But in the last couple days, the 5 year bond yield has started moving a bit more... maybe this means that GIC rates will go higher soon?


Re current bond market. The recent change in the curve is not usual for this stage of the cycle. The curve has steepened as the yield on 30(s) and 10(s) moved up with expectations of inflation. Emphasize investors expectations not reported. Short end is driven by Fed(s) who are holding it down to accommodate reflation. Also short end is by definition pulled to par so the price moves are more muted.

Its been a correction after overshoot last year or a small bear steepener. But the real question is: does it continue or does the curve settle in here while the economy recovers and regains its footing? Questions for market timers and those with duration mandates less then five years. Others stick to their plan.


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## james4beach

If interest rates go up much more, I think stocks are going to start tanking. People seem to be forgetting that most large companies are highly dependent on borrowing. There will be a breaking point, if borrowing costs keep rising like this.

Should be interesting, anyway!


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## like_to_retire

james4beach said:


> If interest rates go up much more, I think stocks are going to start tanking. People seem to be forgetting that most large companies are highly dependent on borrowing. There will be a breaking point, if borrowing costs keep rising like this.
> 
> Should be interesting, anyway!


Doesn't it depend a lot on the rate of change? Interest rates were 20% back in 1981, and businesses survived through those long years of high rates. If interest rates rose very slowly, I suspect business would simply adapt.

ltr


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## hfp75

Slow change is way more manageable, yes but were debt vs revenue ratios the same in the early 80s ?


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