# Defined benefit plan and dumping your bonds?



## Blush (Jan 9, 2014)

Any thoughts on this Article...why people who have a defined benefit plan should dump their bonds?

http://www.theglobeandmail.com/glob...plan-should-dump-their-bonds/article20378918/


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## OptsyEagle (Nov 29, 2009)

The article is right and wrong at the same time. In theory, people with DB pensions have a considerable amount of their wealth in fixed income and should not require more in their personal portfolios. The problem is that fixed income is designed to balance a person's portfolio, not the person themselves. The idea of having a great pension will be lost on a lot of investors once they see their portfolio dropping 30% to 40% in a bad stock market. Fixed income is designed to cushion that situation and it has very little to do with a pension plan.

That being said, a person that does not need to draw income from their portfolio, should have a little more fortitude to weather the stock market downturns then a person who is relying on it to provide their basic necessities.


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## Butters (Apr 20, 2012)

Dave Ramsey. The king of debt free doesn't believe in bonds period. He HATES them. 

You just put 15% of your income in good growth mutual funds. Over 20 year period you should expect 10% per year. 
Now if you're 70 years old you might not have 20 years.


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## leslie (May 25, 2009)

I agree with the article. Similarly I don't think that people with a mortgage should own bonds in their AA or people with annuities. Although I appreciate the theory in OptsyEagle's first paragraph above, IMO it is his second paragraph that is most important. The AA decision is all about risk tolerance. I believe people have mental compartments in which they have safe money and play money. The higher someone's pension, annuity, CPP, etc the more they will look at their stock investments as 'play money' --- and be less stressed out by market declines.


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## cashinstinct (Apr 4, 2009)

I agree with the article, but it's psychologic / emotional to be able to stay in 100% stocks in your personal portfolio that you control.

I have no idea why I would need bonds at 28 years old when I have a DB pension plan well-funded from a gov. agency.

I have cash on the side for future projects such as used car that could be diverted to stocks if there is a crash, but my invested money is 100% stocks....


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## Ponderling (Mar 1, 2013)

Keep bonds around based on how much risk you can take with your other investments. I hold shares in my company, which is about 2200 technical professionals, mostly in Canada. The majority owner is actually a pension fund who bought into us as a proxy for a better return than bonds. These shares are about a quarter of my and my wife's portfolio net worth that ultimately funds out retirement. I say portfolio because we do not include the value of our paid off home in what we think of as our retirement portfolio. 

I treat these shares as 2/3 bond, i.e. I have more equity exposure in the total asset mix if these shares were classed purely as equity. They gain a bit every year, pay a bit growing dividend every year, with about half of the returns as dividends. 

When I retire I am mandated to sell of the company shares. When I do so, I will be increasing the pure bond holding in the portfolio to compensate for the loss of this reliable plodder.


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## heyjude (May 16, 2009)

This question has been explored at length by Moshe Milevsky in his book "Are you a Stock or a Bond?". I recommend the book, but I wouldn't take it as investment advice. 

http://www.amazon.ca/Are-You-Stock-Bond-Financial/dp/0133115291

Basically, the argument goes that everyone needs a balanced portfolio. If you are (say) a hedge fund analyst whose entire compensation depends on the markets, your investments should be diversified away from the markets. If you are a civil servant with a defined benefit pension from a government that probably won't default, you can count on stability and you already have the equivalent of a bond portfolio, so your own investments should not be focused on bonds. That doesn't mean you shouldn't have any. 

My father was a civil servant with a COLA defined benefit pension that had a 50% survivor benefit. He also paid into a contributory widow's pension to replace the 50% of pension income that my mother would lose when he died. The bottom line was that my parents' expenses, and later my mother's expenses, never exceeded the value of the pension(s) during their lifetimes. Their portfolio was growing in retirement. They had some bonds, which grew very little and did not outpace inflation, and my mother had an equity portfolio, which grew a lot during the 40 or so years she held it. They also had property, the value of which grew enormously. However, had they lived another two years, they would have encountered a crash in the property market. So in terms of maintaining spending power with low volatility, the COLA DB pension won handily. Equities and property provided growth, but increased volatility. The bonds didn't add much value in their situation.


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## OnlyMyOpinion (Sep 1, 2013)

Ponderling said:


> I hold shares in my company... These shares are about a quarter of my and my wife's portfolio net worth that ultimately funds our retirement.


Speaking out of turn here as I know nothing of circumstances - but something to consider - some people hang onto company shares for years, while others take profits (sell some) on a regular basis and diversify into other investments. Is it wise to have much of one's net worth + monthly income dependent on one company - that all depends on the fortunes of the company. In hindsight, I've seen both approaches end up as the right thing to have done.


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## My Own Advisor (Sep 24, 2012)

I also agree with the article. Bonds are the emotional parachute when equities crash. If you can control your emotions when the sky is falling, not sure you need bonds, certainly if your investment horizon is 20-30 years.


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## yask72 (Mar 11, 2012)

I agree with the article as well. I actually came to the same conclusion myself about 2 years ago. Being fortunate enough to have a government sponsored DB Pension, it just didn't make sense to me to carry bonds. So, i sold all my bonds and i am 100% vested in the stock market for my personal portflio. Should my job or pension situation change i'll have to re-adjust but so far i am very happy and comfortable with that decision.


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## Ponderling (Mar 1, 2013)

OnlyMyOpinion said:


> Speaking out of turn here as I know nothing of circumstances - but something to consider - some people hang onto company shares for years, while others take profits (sell some) on a regular basis and diversify into other investments. Is it wise to have much of one's net worth + monthly income dependent on one company - that all depends on the fortunes of the company. In hindsight, I've seen both approaches end up as the right thing to have done.


I need to hold a certain minimum value of this CCPC shares to have rights to share in the management pool of bonuses. That pool typically pays me between 15 and 20K per year, depending on how the whole of the company and my division has performed, and makes up about a sixth of my annual compensation.

We are an engineering design firm focused on infrastructure. Yes we are vulnerable to the ability of our largely public sector clients to fund our fees, but there is never a shortage of infrastructure renewal projects in Canada for the foreseeable future. 

I don't buy new shares now, other than to reinvest the dividends that are held in one of the RRSP accounts that I have that has to be dedicated to holding these shares.
Only one full service broker get paid to handle all the paperwork with supporting the fair market value of these non publically traded shares within an RRSP, and the company pays the bills for those filings.


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## Gimme the Green (Feb 4, 2014)

I have a fully backed government DB pension. Up to this point, I have kept about 20% of my portfolio in fixed income. I have been reading articles such as this and feel as though I am ready to ditch them and go 100% equities. If my employment circumstances change, then so to will my bond allocation.


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## lonewolf (Jun 12, 2012)

Most people that play the stock market lose money over the long run it does not matter if they have a DB or not. The average investor regardless of type of pension plan would be better off never touching stocks over their life time.


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## MrMatt (Dec 21, 2011)

SheaButters said:


> Dave Ramsey. The king of debt free doesn't believe in bonds period. He HATES them.
> 
> You just put 15% of your income in good growth mutual funds. Over 20 year period you should expect 10% per year.
> Now if you're 70 years old you might not have 20 years.


10%/year over a 20 year period?
I think that's extremely optimistic considering current circumstances (rock bottom interest rates)




lonewolf said:


> Most people that play the stock market lose money over the long run it does not matter if they have a DB or not. The average investor regardless of type of pension plan would be better off never touching stocks over their life time.


Care to back that up with any data?
I'm willing to agree that most people underperform the index.

Secondly I think any pension needs an equity allocation.
Defined contribution, you won't get much return on fixed income.
Defined benefit, I think they all have equity positions, I've never heard of a major pension fund that doesn't hold equities.

Playing the stockmarket by trading individual securities, ETFs, or mutual funds is a distinction without a difference IMO. 
You can destroy your portfolio jumping hot fund to hot fund as quickly as trading hot stock for hot stock.


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## lonewolf (Jun 12, 2012)

Hi, MrMatt

There is no way that everyone @ a poker table makes money. The money works its way to the strongest player or players.

Perhaps Im wrong but the market is like a poker game with the money working toward the strongest players.

I remember reading a book years ago & a broker did a study on his clients through a bull bear cycle & most if not all (cant remember exact details ) of his clients lost money through the complete cycle. I read the book a long time ago can not remember the name of the book because the name was not really important to me. The concept that most lost money I remembered ) Of course I do not believe everything I read for some reason when I read the book I thought the guy was telling the truth.


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## OptsyEagle (Nov 29, 2009)

All I can say is it is not a coincidence that this discussion is happening now with the S&P500 over 2000 and not March of 2009 when it hit 666.

So go ahead, sell your bonds and buy some more stocks. The stock market cannot start going down until you do.


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## Gimme the Green (Feb 4, 2014)

OptsyEagle said:


> All I can say is it is not a coincidence that this discussion is happening now with the S&P500 over 2000 and not March of 2009 when it hit 666.
> 
> So go ahead, sell your bonds and buy some more stocks. The stock market cannot start going down until you do.


I hear what you are saying, however for someone that is 35 with time on his side and a DB pension backing him, does it not make sense to take on more risk and possibly reap the rewards? Not a plan for everyone I know but buying blue chip dividend payers with a long horizon seems like a good bet.


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## RBull (Jan 20, 2013)

lonewolf said:


> *Most people that play the stock market lose money over the long run it does not matter if they have a DB or not.* The average investor regardless of type of pension plan would be better off never touching stocks over their life time.


I would also like to see some data that supports that statement. The typical investor likely under performs the market overall but it's very doubtful to me they "lose money over the long run." 

The stock market is nothing like a poker game because the stake for everyone is on average rising over time with growing companies and earnings, and there is also opportunity for regular payouts (dividends). There is also a nearly infinite number of "players" and you need not "show your hand" or cash in your stakes each game, until you choose. Poker is largely about luck and bluffing.


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## My Own Advisor (Sep 24, 2012)

I would agree with you RBull.

I mean, for those investors that like to trade or "play the stock market" as the commenter put it, then yes, they will likely lose more than they win and definitely underperform the equity market.

I would be very surprised if someone that held a basket of stocks that pay dividends, or not, would lose severely if they _didn't trade them. _

The problem with most investors, they trade in and out of stocks every few months or few years. I'm convinced the story is different for those willing to hold these stocks for 20 or 30 or more years.

I'd like to hear from some investors who have bought and held (*the same*) stocks for 20+ years....maybe there are a few in this forum?

I'm not there yet. The longest I have held one individual stock is just over 6 years and I have no intention of selling it.


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## MrMatt (Dec 21, 2011)

lonewolf said:


> Hi, MrMatt
> 
> There is no way that everyone @ a poker table makes money. The money works its way to the strongest player or players.
> 
> ...


You're wrong.

Gambing at a poker table is a zero sum game (negative sum if you're at a casino and they take a cut)

If the stock market was just trading, it could be a zero sum game.
The reality is that stocks tend to increase in value over time.

Lets say I buy a stock, perhaps TD bank at one price, I get some dividends and later sell it to someone else at a higher price (I win). They get some dividends and sell it to someone else (they win).
For good profitable companies they can continue to generate generation after generation of winners.

Now in that same time you could buy and sell so much that you manage to lose money, and lots of people do. That's why for most people they should simply buy an equity fund and ignore it, and let it grow.


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## protomok (Jul 9, 2012)

Even for folks with gold plated govt pensions I still think they should have a position in FI. Without a FI position you will have to also be OK with sitting on the sidelines in times like 2009 or 2011 when you could have instead been picking up bargains in equities. The FI doesn't have to be bonds, it could cash, HISA, redeemable GIC, it could be considered a "safety cushion", whatever, it just needs to be available in the case of a market correction.

Maybe some would call this market timing, but IMO if I'm a long term investor and I see a stock well below my avg purchase price, why not jump on it?


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## OnlyMyOpinion (Sep 1, 2013)

protomok said:


> Even for folks with gold plated govt pensions I still think they should have a position in FI. Without a FI position you will have to also be OK with sitting on the sidelines in times like 2009 or 2011 when you could have instead been picking up bargains in equities. The FI doesn't have to be bonds, it could cash, HISA, redeemable GIC, it could be considered a "safety cushion", whatever, it just needs to be available in the case of a market correction. Maybe some would call this market timing, but IMO if I'm a long term investor and I see a stock well below my avg purchase price, why not jump on it?


Maybe the distinction is in long term vs short term. I think the idea is that long term you don't necessarily build a fixed income 'slice' if you have a good DB pension. But you might still hold a slice of cash or even short term money as part of your equity portfolio if you feel the market is overpriced and due for a correctiion?


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## My Own Advisor (Sep 24, 2012)

Most 20, 25-year DB pensions would comprise at least 40-50% of an individual investors portfolio. 

Not point in building any individual "fixed-income" slice; especially if an investor's DB plan is a government pension. Just my take.


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## pastorash (Feb 3, 2014)

I tend to agree with a lot of folk here. My wife has a nice government DB pension and thankfully she loves her job. We'll both have CPP etc... and our time line for needing this is 15-20 years. My own so so company DC pension money and my almost 2 year old DIY RRSP is relatively equity driven with little FI. It is because it represents such a small amount of the overall that I don't mind "playing" a bit, though 3 or 4 of the 5 stocks I own now will likely stay in my account until I can't remember the reason I bought them in the first place. Rising dividends is what I'm after and with "safe" stocks these are relatively secure.

Bombardier though.... can't wait to get rid of that, still hoping for some short term appreciation so I can cut my losses there.


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## My Own Advisor (Sep 24, 2012)

Good to read your comment pastorash. 

On the downside, I don't own BBD, I figure it's like owning part of a government bond but without the bond-like security.
http://www.huffingtonpost.ca/mark-milke/bombardier-corporate-welfare-trap_b_4705751.html


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