# Poll: your confidence in stock returns



## james4beach (Nov 15, 2012)

Considering only Canadian stock returns (TSX index, 5-pack, or whatever else you use for your Canadian exposure), and using a generic bond index like VAB/XBB for the bond category,

*How confident are you that stocks will outperform bonds over the next 10 years?* (total return)


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## Nerd Investor (Nov 3, 2015)

The index or my stocks? Edit: sorry, I guess you've addressed that. So whatever we use personally.


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## new dog (Jun 21, 2016)

Tough poll since both bonds and stocks are due to be run out of town. However if the money printing is able to crank up again then who knows what the currency value of the stock market would be and in that case bonds wouldn't win.


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## Argonaut (Dec 7, 2010)

I'm 97% confident dividends on my Canadian stocks will outperform bond interest. I'm 86% confident my stocks will outperform bonds overall in the next 10 years.


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## agent99 (Sep 11, 2013)

Nerd Investor said:


> The index or my stocks? Edit: sorry, I guess you've addressed that. So whatever we use personally.


The question could have been better. To get a meaningful result, stocks & bonds need to be more clearly defined. If you look at tsx60 vs cdn FI since 2000 (to reduce 2008 effect if 10yrs are used), stocks are just a little ahead. But starting now may be a different thing. Buying or creating a balanced portfolio may be the answer.

This site allows historical comparisons: http://www.theglobeandmail.com/glob...id=53057&symbol=&style=na_eq&profile_type=ROB


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## Rusty O'Toole (Feb 1, 2012)

I don't see how interest rates can go any lower. The only direction is up. If interest rates rise, the value of all existing bonds falls. As for the stock market we are in year 9 of a bull market, and they typically last 4 or 5 years. So we are overdue for a major correction or bear market. But since bear markets typically last a year or 2 in 10 years the stock market should be as high as it is now or higher.


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## james4beach (Nov 15, 2012)

agent99 said:


> The question could have been better. To get a meaningful result, stocks & bonds need to be more clearly defined. If you look at tsx60 vs cdn FI since 2000 (to reduce 2008 effect if 10yrs are used), stocks are just a little ahead. But starting now may be a different thing. Buying or creating a balanced portfolio may be the answer.


Yes perhaps I should have more clearly defined stocks and bonds (say TSX or XIC vs XBB bonds). As you point out, there was quite a stretch there where bonds returned as much as the TSX index.


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## new dog (Jun 21, 2016)

Rusty O'Toole said:


> I don't see how interest rates can go any lower. The only direction is up. If interest rates rise, the value of all existing bonds falls. As for the stock market we are in year 9 of a bull market, and they typically last 4 or 5 years. So we are overdue for a major correction or bear market. But since bear markets typically last a year or 2 in 10 years the stock market should be as high as it is now or higher.



I was thinking this as well, so maybe a 4 to 5 year time frame may be better in catching this cycle.

In 10 years the bond market may be the best market of them all if interest rates rise enough and wash everything out. Sure stocks could be a great buy but if interest rates are far to high then I would take the easy guarantee of bonds.


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## Eder (Feb 16, 2011)

I think you assumed we would use our RRSP in this poll...I would have voted stocks 100% to outperform if in investment account due to ridiculous tax rates bond interest is subject to.


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## AltaRed (Jun 8, 2009)

I said Moderately primarily because we could have a significant bout of inflation sometime in the next 10 years that would result in a need to jack up interest rates... which would clearly whack a majority of stocks (except most of the financials). Failing that single scenario, I believe stocks will almost certainly outperform bonds.


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## lonewolf :) (Sep 13, 2016)

United states Since June 1987 the Confrence board has asked 3000 or so house holds each month if they believed stock prices would be higher in next 12 months.

March 2017 47.4 said yes, The highest level of bullish respondents except for one month Jan 2000 reading of 47.7 which lead to the weakest decade for stocks on record.


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## SWIG (Apr 7, 2017)

I'm 94% confident dividends on my Canadian stocks will outperform bond interest. I'm 81% confident my stocks will outperform bonds overall in the next 10 years.


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## twa2w (Mar 5, 2016)

AltaRed said:


> I said Moderately primarily because we could have a significant bout of inflation sometime in the next 10 years that would result in a need to jack up interest rates... which would clearly whack a majority of stocks (except most of the financials). Failing that single scenario, I believe stocks will almost certainly outperform bonds.


Rising interest rates could also whack the heck out of bond prices.


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## james4beach (Nov 15, 2012)

twa2w said:


> Rising interest rates could also whack the heck out of bond prices.


Just temporarily. It also means all new bonds they purchase have higher yields. If you look back at the 1970s and into 80s you'll see that even with interest rates spiking, bond funds had positive returns. But certainly pain along the way.

More recently though, with gradually rising interest rates 2003-2008, bond funds performed very well. The message here is that rising interest rates don't necessarily cause poor bond fund performance.


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## mrPPincer (Nov 21, 2011)

^Curious though, do the 03-08 numbers back this up?
Did bonds even outperform HISAs in that five year period?

Even if so, right now, HISAs are paying 2-3%, guaranteed, which is more than bonds are paying.


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## james4beach (Nov 15, 2012)

mrPPincer said:


> ^Curious though, do the 03-08 numbers back this up?
> Did bonds even outperform HISAs in that five year period?


Yes.

I only have US data, but here's what happened there, 2003-07-01 to 2007-07-01. *The 10 year treasury yield increased from 3.6% to 5.1%* which is a substantial increase in interest rates. Bond prices fell. (The price of the 10 year benchmark bond, looked at alone, fell about 8%)

LQD bond fund, which has 10 year exposure, returned 2.79% per year.
VBMFX, a generic bond fund similar to VAB, _returned even more_.
SHY bond fund, short term bonds, returned 2.41% per year.
High interest savings returned 2.5% - 2.6% per year.

There was no harm done being invested in the "regular" bond fund while interest rates increased. The mistake people constantly make with this is fixating, incorrectly, on the price of the benchmark treasury bond falling (8% decline).

In fact over this period, the typical "10 year avg maturity" bond funds outperformed both short term bonds and cash.


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## twa2w (Mar 5, 2016)

But remember bond funds were starting from much higher rates so there was enough interest income to offset the capital loss. That is not the case today. 
Of course much will depend on how quickly rates rise and how nimble funds managers are managing maturities. As well as how much flexibility their mandate gives them to look at alternate investments and grades.
You are also looking at averages. Take a look at individual yearly returns. There were some years that were not pretty. In fact a couple of times some money market funds struggled to maintain their 10.00 unit price. ( not necessarily in the time frame you are referring to - it may have been earlier ie 80's,)


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## mrPPincer (Nov 21, 2011)

mrPPincer said:


> ^Curious though, do the 03-08 numbers back this up?
> Did bonds even outperform HISAs in that five year period?
> 
> Even if so, right now, HISAs are paying 2-3%, guaranteed, which is more than bonds are paying.


^I should qualify that statement. Up to 2% in regular HISA rates, but 2-3%+ or so currently if one is willing to chase the promos (which I've been doing for some years now).


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## james4beach (Nov 15, 2012)

twa2w said:


> But remember bond funds were starting from much higher rates so there was enough interest income to offset the capital loss. That is not the case today.


True, this is a big difference. The result may not be the same today with such low rates.


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## Pluto (Sep 12, 2013)

99.9% sure quality stocks will out perform bonds. One is better off owning a pice of a quaility business than loaning money to the business.


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## james4beach (Nov 15, 2012)

Pluto said:


> 99.9% sure quality stocks will out perform bonds. One is better off owning a pice of a quaility business than loaning money to the business.


Pluto, doesn't it make you wonder why anyone would bother lending money at all?

With the levels of certainty being shown in this poll, it's almost like the whole bond market shouldn't exist at all


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## AltaRed (Jun 8, 2009)

And remember the global bond market is way bigger than the equity market. Go figure.......


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## twa2w (Mar 5, 2016)

Pluto said:


> 99.9% sure quality stocks will out perform bonds. One is better off owning a pice of a quaility business than loaning money to the business.


Guess that depends on what you define as a quality stock. Anyone remember the nifty fifty. Or fortunes best stocks for the next decade. ;-)


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## twa2w (Mar 5, 2016)

AltaRed said:


> And remember the global bond market is way bigger than the equity market. Go figure.......


Of course. If you own a business why would you give up equity if you didn't have to.


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## mordko (Jan 23, 2016)

Most of the bond market = governments. Not sure they have means of "giving up equity".


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## hboy54 (Sep 16, 2016)

james4beach said:


> Pluto, doesn't it make you wonder why anyone would bother lending money at all?
> 
> With the levels of certainty being shown in this poll, it's almost like the whole bond market shouldn't exist at all


"People fear a loss more than they value a gain"

I see the above quote as the apex of the triangle that is all investing knowledge and everything else is underneath it.

So given your abstract question and a century of returns history, the answer to you poll makes sense. If you had asked how people were actually going to invest for the next decade, that is give them a potential loss to fear, then I suspect you would get different results.

Hboy54


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## AltaRed (Jun 8, 2009)

hboy54 said:


> So given your abstract question and a century of returns history, the answer to you poll makes sense. If you had asked how people were actually going to invest for the next decade, that is give them a potential loss to fear, then I suspect you would get different results.


You think so? I interpreted the poll and the responsed based on how I thought the posters would actually invest in the next 10 years. 

My response assumes I will stay with my current (high equity) asset allocation for the next 10 years (and I am 11 years into withdrawal mode). Course all bets might be off if the bond yield curve starts to move significantly. I think it will move, but not double in 10 years. But will be holding on to my current financials allocation (especially lifecos and associated rate reset prefs) as a mitigating measure for rising bond yields.


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## treva84 (Dec 9, 2014)

The stock market in Canada and the US has a P/E of ~ 22, which equates to an earnings yield of ~4.5%. Canadian 10 year Govt bonds, at present, are yielding 1.55%, which equates to a P/Yield of ~67.

Think earnings are financial hand waving that are easily manipulated? Looking at price to cash flow, the US has a ~7.6% cash flow yield, while Canada has a ~ 10% cash flow yield. 

In my opinion people are greatly overvaluing safety and thus future returns in bonds will be dismal, relative to stocks.

Furthermore, irrespective of our opinions, the historical evidence shows that over most 10 year rolling periods stocks outperform bonds, and the longer the time period becomes, the greater the outperformance. 

I don't know about you guys, but I'm planning on holding my equities for longer than a decade.


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## AltaRed (Jun 8, 2009)

treva84 said:


> I don't know about you guys, but I'm planning on holding my equities for longer than a decade.


I don't believe the discussion here suggested holding equities for only a 10 year period. The discussion is about what one thinks will happen over the next 10 years specifically.


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## twa2w (Mar 5, 2016)

mordko said:


> Most of the bond market = governments. Not sure they have means of "giving up equity".


True. But I was thinking more of corps as the inference seemed to be why would a company issue debt vs stock.


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## treva84 (Dec 9, 2014)

AltaRed said:


> I don't believe the discussion here suggested holding equities for only a 10 year period. The discussion is about what one thinks will happen over the next 10 years specifically.


Fair enough; my point was essentially if we have a long time horizon and are holding for longer than 10 years, and the longer you hold the better you'll do, why does the next 10 years matter?


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## AltaRed (Jun 8, 2009)

treva84 said:


> Fair enough; my point was essentially if we have a long time horizon and are holding for longer than 10 years, and the longer you hold the better you'll do, why does the next 10 years matter?


It doesn't. It is simply the premise of the poll for discussion purposes. Start a new poll if you wish with a 30 year horizon.


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## mark0f0 (Oct 1, 2016)

I'm buying the TSX index (XIU) for nearly the same price as a decade ago, with dramatically stronger balance sheets. I'm buying gold and silver mining stocks for prices more typical of 30-35 years ago. With a significant runway for appreciation at least to, and exceeding book value.

So extremely confident. I see people all around speculating in houses, in bonds, in tech stocks, in US consumer stocks, but I don't see many people having any interest in relatively boring, yet solidly profitable long-term businesses.


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## mark0f0 (Oct 1, 2016)

treva84 said:


> The stock market in Canada and the US has a P/E of ~ 22, which equates to an earnings yield of ~4.5%. Canadian 10 year Govt bonds, at present, are yielding 1.55%, which equates to a P/Yield of ~67.


If you do the math on an after-tax basis, the valuation of bonds relative to stocks looks even more absurd. As the TSX P/E is quoted as after-tax, while government bonds yields are quoted as pre-tax.


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## mordko (Jan 23, 2016)

North American stocks look expensive to me based on multiples and a bunch of other indicators. These multiples are at the levels that have typically preceded a crash. And if US market goes down, it will likely pull Canada with it. 

Incidentally, both Canada and the US now represent a much, much higher proportion of the world stock market compared to GDP. Not a good sign; that's what happened to Japan in the 90s. 

This valuation of N American stocks may or may not be justified. In general, there is a lot of optimism and confidence in the economy, tax-cutting, continued trade, etc... If it all works out as planned then profits will go up, multiples will drop and stock prices will go up even further. Also, there is a long way to fall if things go wrong. 

Not a reason to be out of stocks but it is a good reason to 

a) Diversify between asset classes 
b) Diversify geographically, minimize home bias 
c) Minimize leverage


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## mordko (Jan 23, 2016)

This is what Vanguard has to say on the subject: https://personal.vanguard.com/us/in...?cmpgn=SM:RIG:XX:XX:FB:XX:XX:XX:SF_sf66876595


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## treva84 (Dec 9, 2014)

mordko said:


> This is what Vanguard has to say on the subject: https://personal.vanguard.com/us/in...?cmpgn=SM:RIG:XX:XX:FB:XX:XX:XX:SF_sf66876595


That was interesting - thanks for sharing!


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## Koogie (Dec 15, 2014)

treva84 said:


> That was interesting - thanks for sharing!


+1

However, as much as I respect Vanguard (and they have a lot of my money) their prognostications are simply that, prognostications. They might be extremely good at managing money but "it's difficult to make predictions, especially about the future"


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## AltaRed (Jun 8, 2009)

True but directionally, it is at least logical. Global (free-er) trade, technology advances and decelerating global population growth are all forces to be reckoned with. The collapse of the super commodity cycle tells some of the story. I don't expect unabridged growth in bricks and mortar goods to re-appear. I've certainly lowered my expectations of future total returns to perhaps 5% (all equity) or 3% (balanced) portfolio. Still plenty good for a retiree in withdrawal mode.


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## GreatLaker (Mar 23, 2014)

AltaRed said:


> I've certainly lowered my expectations of future total returns to perhaps 5% (all equity) or 3% (balanced) portfolio. Still plenty good for a retiree in withdrawal mode.


Are those nominal growth numbers or real? I have stress tested my plan down to a 1% real return, with moderately generous spending and it still works, but sure hope we do better than that.


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## AltaRed (Jun 8, 2009)

Real... Should have stated that albeit I am making an assumption of about 1% long term inflation anyway. If inflation sticks around 2% and lord knows, western democracies are trying to spend their way into GDP growth (which I think will be a major failure), I expect some compression between real and nominal returns, i.e. we won't see the full 'benefit' in stock/bond returns.

I expect the 5-10 year nominal bond yield curve to be in the 3% range long term and stocks to deliver circa 6% nominal (split more or less equally between dividend yield and capital appreciation). I am pretty non-plussed about marginal real returns. My portfolio is big enough to deliver and I'd much prefer a low inflationary environment in any case.


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## olivaw (Nov 21, 2010)

Stocks usually outperform bonds but I voted "moderately confident - could go either way". We've ridden a pretty nice bull market since 2009 with only minor pullbacks. At some point there will be crash/bear market. It could happen in 2017 or it might be further out. We can't possible know when it will happen but we do know that it will happen one of these years.

Canada's economic outlook is reasonably bright but we're part of the global economy. The TSX will (of course) respond to global pressures.

Bonds returns will almost certainly continue to be pitiful but they will outpace equities during a bear market.

As for my asset allocation - no change. I suck at market timing.


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## Eder (Feb 16, 2011)

olivaw said:


> At some point there will be crash/bear market. It could happen in 2017 or it might be further out. We can't possible know when it will happen but we do know that it will happen one of these years.


 We already had it in 2016.


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## james4beach (Nov 15, 2012)

olivaw said:


> Bonds returns will almost certainly continue to be pitiful but they will outpace equities during a bear market.


I agree.



> As for my asset allocation - no change. I suck at market timing.


Same here, I have equal weight stocks and bonds (or more accurately, equal weight stocks, bonds, gold, and cash)


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## hboy54 (Sep 16, 2016)

AltaRed said:


> You think so? I interpreted the poll and the responsed based on how I thought the posters would actually invest in the next 10 years.
> 
> My response assumes I will stay with my current (high equity) asset allocation for the next 10 years (and I am 11 years into withdrawal mode). Course all bets might be off if the bond yield curve starts to move significantly. I think it will move, but not double in 10 years. But will be holding on to my current financials allocation (especially lifecos and associated rate reset prefs) as a mitigating measure for rising bond yields.


Given that the 3rd of 4 categories is a 50:50 chance, the whole survey implies what, 90% equity, and 10% FI maybe. I do not believe that this is the average asset allocation. This I think is what James was hinting at in his comment I was responding to.

Maybe someone should run a survey of actual asset allocation amongst members.

Hboy54


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## Eclectic12 (Oct 20, 2010)

AltaRed said:


> james4beach said:
> 
> 
> > Pluto, doesn't it make you wonder why anyone would bother lending money at all?
> ...


The poll is about confidence ... not whether people are putting their eggs in one basket AFAICT. 




AltaRed said:


> ... I interpreted the poll and the responsed based on how I thought the posters would actually invest in the next 10 years ...


People responding anonymously are responding with a blue print of how they are operating?

Interesting idea but I am doubting it.


Cheers


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## AltaRed (Jun 8, 2009)

Eclectic12 said:


> The poll is about confidence ... not whether people are putting their eggs in one basket AFAICT.
> 
> People responding anonymously are responding with a blue print of how they are operating?
> 
> Interesting idea but I am doubting it.


Perhaps you are right although I would never assume people would put all their money in one basket anyway. There are few that would put all their chips on Red even if they were 'totally confident' that would be the winning play. They still need bus fare to get home...just in case. IOW, there is always some consequential risk and the damage could be hard to recover from. Asset allocation should follow one's confidence, but not in the absolute.

FWIW, I voted 'Moderately confident' and I am actually in the range of 80-85% equity in my portfolio and I am 11 years into retirement. But I have CPP and a small DB pension to backstop me for bus fare home.


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## Pluto (Sep 12, 2013)

james4beach said:


> Pluto, doesn't it make you wonder why anyone would bother lending money at all?
> 
> With the levels of certainty being shown in this poll, it's almost like the whole bond market shouldn't exist at all


Yes, it does make me wonder. there has been a massive bull makrtet in bonds since 1981 which has, perhaps, lulled investors. That bull market is, for all practical purposes, over. In order for bonds to compete there has to be falling rates which precipitate capital gains from bonds. I doubt that will happen over the next 10 years. Meanwhile, quality stocks will grow, and raise dividends.


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## andrewf (Mar 1, 2010)

Depends on risk-aversion, liability-matching & regulation. Aren't the bulk of bond buyers institutions?


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## Pluto (Sep 12, 2013)

hboy54 said:


> "People fear a loss more than they value a gain"
> 
> I see the above quote as the apex of the triangle that is all investing knowledge and everything else is underneath it.
> 
> ...


yes, if I understand your post. I have 70% in short term bonds right now as I fear a (paper) loss if I put it all in stocks right now. If I'd had all this cash in Jan-Feb 2016, it would all be in stocks -
forever. As soon as stocks show better value, I'm out of bonds. So i do have a use for bonds, but it is only a temporary use. 

As far as other folks go who have 50% or so in bonds all the time, for safety reasons or somthing, it makes me wonder what type of stocks they own that makes them desire all that "safety".


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## Pluto (Sep 12, 2013)

twa2w said:


> Guess that depends on what you define as a quality stock. Anyone remember the nifty fifty. Or fortunes best stocks for the next decade. ;-)


Yes, it depends. The nifty fifty would have been fine if one would have bought them near the 1974 lows. Most, maybe all of the nifty fifty were quality, but over priced when first labeled as the nifty fifty, otherwise, as far as I know, there was nothing wrong with them. But buy them at fair value or better and one would have done fine. This is touching on a issue that is sensitive for some on this forum - paying attention to value and appreciation potential is, according to them, "timing the market". To me paying attention to appreciation potential is more like not being a fool.


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## Pluto (Sep 12, 2013)

twa2w said:


> True. But I was thinking more of corps as the inference seemed to be why would a company issue debt vs stock.


good topic. Corps issue debt because it is usually good for them, not the bond holder. that's one reason why owning stocks is better. I'll leave loaning money to the pros, such as banks. they know how to make money being a loaner, and I'll own bank stock to benifit from their expertise.


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## AltaRed (Jun 8, 2009)

twa2w said:


> True. But I was thinking more of corps as the inference seemed to be why would a company issue debt vs stock.


I'll add to this.... Corps typically liike debt better since expected returns are lower, i.e. debtholders only expect their interest payments back. And institutions typically are not as interventionist as shareholders. Shareholders expect a double digit return on equity. I once worked for a company with essentially zero long term debt. Their cost of capital was therefore high (relative to others). They needed their projects to have a ROCE of 15% or better whereas in a case of 50/50 D/E ratio, that cost of capital would be more like (15x50% + 5x50%) = 10%


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## mark0f0 (Oct 1, 2016)

AltaRed said:


> I'll add to this.... Corps typically liike debt better since expected returns are lower, i.e. debtholders only expect their interest payments back. And institutions typically are not as interventionist as shareholders. Shareholders expect a double digit return on equity. I once worked for a company with essentially zero long term debt. Their cost of capital was therefore high (relative to others). They needed their projects to have a ROCE of 15% or better whereas in a case of 50/50 D/E ratio, that cost of capital would be more like (15x50% + 5x50%) = 10%


Yup. There's no point in investing in anything that yields less than the long-term return of the stock market. Otherwise, a firm should just use it equity resources to buy index funds. 

IIRC, you were involved in O&G, so even a 15% ROCE sounds a bit on the low side for the sort of cyclicality involved with the sector.


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## AltaRed (Jun 8, 2009)

mark0f0 said:


> IIRC, you were involved in O&G, so even a 15% ROCE sounds a bit on the low side for the sort of cyclicality involved with the sector.


That was a minimum target and 'all in' returns including exploration failures, G&A, writeoffs, etc. i.e. the company's bottom line based on earnings. Individual discounted cash flow project economics had to be much better than 15% to get a long term ROCE of 15% or better.


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## stantistic (Sep 19, 2015)

Another view of this question. 
http://www.bnn.ca/larry-berman-should-you-have-long-bonds-in-your-portfolio-1.720277


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## james4beach (Nov 15, 2012)

stantistic said:


> http://www.bnn.ca/larry-berman-should-you-have-long-bonds-in-your-portfolio-1.720277


I like Larry Berman's stuff by the way. I think his point in that article is that (long) bonds offer the most portfolio diversification effect. This is also the argument behind having bonds in the permanent portfolio. You don't do it for their return aspect, you do it for the loose correlation with the other assets, that gives lower overall volatility. The sum is greater than its parts.

I agree with Larry that bonds are universally hated and I _have_ done the contrarian thing and purchased more bonds during the recent lows. Quoting Larry:



> I suspect most investor only consider the returns because unless you really do your homework, the risk numbers are not well disclosed by the industry. I’ve been saying for years: This is the biggest tragedy in the investing world for do-it-yourself investors. We must have a way of estimating forward returns and risk before making an investment. Bonds are universally hated and most analysts expect bond yields to higher (prices lower) by the end of the year. The bearish bond trade is very overcrowded and the bond bears on average have been wrong for 15 years.


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## TomB19 (Sep 24, 2015)

This.




Argonaut said:


> I'm 97% confident dividends on my Canadian stocks will outperform bond interest. I'm 86% confident my stocks will outperform bonds overall in the next 10 years.


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## james4beach (Nov 15, 2012)

Thanks for the poll responses, everyone! It's interesting to see this wide range of opinions.


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