# It’s time for retirees to get out of bonds



## agent99 (Sep 11, 2013)

We have had discussions along these lines before. Should we invest in bonds or even GICs that offer zero or even negative real returns? Some who don't need income on their savings, say they do it because of guaranteed return OF capital. However, some of that capital will be eroded if real returns are negative. A bit like keeping cash under mattress. 

So where should we put our money? Many go to real things that are likely to maintain value. Property, gold even some stocks. But as more an more funds are invested this way, these real things also tend to get inflated - Capital Inflation. So not a panacea.

This was in the Globe & Mail recently and may be something for retirees and perhaps even younger investors to think about?

*Why one of Canada’s leading actuaries says it’s time for retirees to get out of bonds*
Ian McGugan
19-24 minutes

It is high time for retirees and pension funds to dial back their exposure to “dead-weight” bonds, according to one of Canada’s leading actuaries.
Keith Ambachtsheer, the president of KPA Advisory Services in Toronto and director emeritus of the International Centre for Pension Management at the University of Toronto, argues that bonds at their current, dismal yields can no longer deliver the returns needed to fund retirements – not unless you assume savings rates well above what most of us would regard as practicable.
“Twenty years ago, inflation-indexed bonds offered a real yield of 4 per cent,” Mr. Ambachtsheer wrote in a report. “Today their yield is not just zero, but actually negative.”
The upshot is that bonds are “dead-weight investments” that “currently have no role” to play in the investment policies of continuing pension plans, he said.
In an interview, he suggested that similar logic applies to many personal portfolios. Bonds can no longer reliably generate much cash flow for retirees, so savers hoping to generate steady income from their holdings have to contemplate the notion of cutting back on their exposure to bonds.
His comments demonstrate how the long fall in interest rates in recent years is disrupting some of the most sacred tenets of investing.
*Canada 10-year bond yield since 1960*
For decades, pension funds and private investors regarded a portfolio composed of 60 per cent stocks and 40 per cent bonds as the sturdy all-terrain vehicle of the investing world. A 60-40 portfolio was supposed to deliver decent returns in just about any investing environment.
That proposition now seems in doubt. Benchmark 10-year Government of Canada bonds are yielding barely half a percentage point in annual payout. After adjusting for the corrosive effect of inflation on purchasing power, a typical bond is poised to deliver a negative return in real, or after-inflation, terms.
This challenges the logic underlying a 60-40 portfolio. When yields were substantially higher a decade or more ago, bonds acted both as a buffer against stock market weakness and as a source of real returns in their own right.
No longer. At their current yields, bonds are likely to actually subtract from a portfolio’s long-run buying power.
With interest rates already so low, bonds may not serve as much of a buffer, either. Yields have little room to move even lower because they are already bumping up against zero. As a result, bond prices (which move in the opposite direction to bond yields) have limited room to gain even if the world slumps back into economic turmoil.
So what should investors hold instead of bonds? Solid dividend-paying stocks, Mr. Ambachtsheer suggests.
Consider Unilever Group, he says. The giant British-Dutch consumer-products company pays a dividend yield of just over 3 per cent. History suggests it can grow that dividend at 1 per cent or more a year.
In theory, a stock’s long-term return should be equal to the sum of its dividend yield and its dividend growth rate. If so, Unilever should be able to deliver a real return of at least 4 per cent a year. This is far in excess of what most bonds are now paying.
Investors who select a cluster of similar dividend payers are likely to fare much better than people who stick to a traditional diversified portfolio, Mr. Ambachtsheer asserts. He suggests pension funds should shift to using a portfolio of dividend-paying stocks as their benchmark, or reference portfolio, in years to come.
“Rather than the traditional 60-40 stock-bond policy mix, such a well-diversified stock portfolio has become the reference portfolio for sustainable going-concern pension plans aspiring to deliver adequate inflation-linked pensions at affordable contribution rates into the indefinite future,” he wrote.
There are, to be sure, some objections to this viewpoint. One is whether pension funds and individuals are prepared to deal with the occasional but devastating paper losses that go along with holding an all-equity portfolio.
Mr. Ambachtsheer acknowledges that staying calm during crises requires strong nerves, both for investors and for pension plan sponsors. But the evidence is clear, he argues: Thanks to the Keynesian policies put in place since the Second World War, sustained economic depressions have become a thing of the past. In the long run, stocks as a whole don’t stay in the red.
Going back to the Unilever example, investors shouldn’t focus on the spikes and dips in its share price over the years. Instead, he said, they should celebrate “the fact that Unilever’s dividends have grown steadily decade after decade with very little volatility.”


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## AltaRed (Jun 8, 2009)

Central bank policy is now set on 'ensuring' cash is 'invested' which cannot help but cause asset inflation, both in capital and real markets. Ultimately this cannot end well long term BUT what does one do in the meantime? I empathize with those who are having to make asset allocation decisions and more specifically whether to abandon the classic 60/40 balanced portfolio. Various financial types are now saying that 70/30 or 75/25 is the new 60/40 but that, in itself, can be dangerous if folks are not paying attention to longer term trends.

The article is off tangent in my opinion regarding equities. The return performance of a stock (total return) is the sum of capital appreciation and dividend yield, which in itself is ultimately growth in earnings per share (EPS) over the long term (near term stock market volatility notwithstanding). I think there will be (already is) herd shifting to dividend stocks and that will cause asset inflation (inflated P/E valuations). The risk is getting too far into excessive valuation territory. I don't have an answer except to suggest that investors shifting to dividend equities be cognizant of EPS growth, D/E ratio, and ROC (more than ROE) to avoid leveraged balance sheets. Corporate managements are going to be teased into dividend growth at the potential expense of insufficient re-investment in the business and leveraging of balance sheets. Increasing debt loads will eventually become devastating to those who over-leverage.

For old farts like me, I can just continue to do what I have been doing. Hold X years of fixed income in reserve to counter bear equity markets from time to time and ensure that fixed income is indeed readily accessible and essentially risk free. I don't care about return ON that capital. I want return OF that capital. I simply look at my FI component as a X year emergency fund consisting of a 5 year ladder of bonds/GICs and HiSA accounts. If it only gives me a 1-2% nominal return (negative in real and AT terms), so be it. It is simply my 'lifeline' to what is otherwise an 'all equity' portfolio*.

* Basically, I can look at my portfolio as an 85/15 portfolio in the classic sense, OR I can look at it as an 'all equity' portfolio with an X year cash equivalent emergency fund. I think some investors should start looking more and more at the latter view but that may be risky for someone mid-career when they will still experience multiple business cycles in their lifetime.


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## pwm (Jan 19, 2012)

I totally agree agent99. Retirees need to get out of bonds.

I think the same as you AltaRed. I've been retired 15 years and I always was, and still am, invested 100% in equities or equity funds. I don't hold any bonds or bond funds, however I do hold a cash reserve in HISAs. I think of it as if I were a fund manager with a cash portion in my personal fund. Nothing wrong with holding some cash, and any responsible fund manager would do so.


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## AltaRed (Jun 8, 2009)

Those of us discussing this subject, and who have DB pensions covering some/all of our basic living expenses, should qualify our responses accordingly because annuity payments are really guaranteed fixed income. I have a relatively small DB pension which helps cover much of our basis living expenses and my cash reserve to cover X years of living expenses takes that into consideration, i.e. it would have to be larger if I didn't have that DB pension component.

Another way of saying the same thing is one "protects" on the downside with the cards one has in their hand. It may contain an Ace, a Jack and a deuce... or


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## Eder (Feb 16, 2011)

As rates are approaching zero I have been making some changes...we'll see hows thing go in a few years... no pension here.

2% is as low a return as I will go on my GIC ladder. I'll be likely swapping them over to REIT's as they mature .

I have been vacuuming up some rate resets for additional fixed income in my investment account but it seems that train has left the station the last few months and prices have moved much higher.

I am holding a pretty large cash position (for me) that I intend to buy some real estate with should stuff go on sale when people can't pay their mortgages but I do think that may be a crowded trade.

I get OAS next year...I can live large on that cash should things go awry haha.


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## james4beach (Nov 15, 2012)

The initial post says "retirees" and I completely agree that retirees should reduce duration and stick to shorter maturities. A retiree who is currently withdrawing money should probably not be in a typical bond fund at 10 year average maturity. Maybe 5 years is more appropriate.

So while I agree with reducing maturity, I don't agree with getting out of bonds entirely. Two big reasons

*1. Possibility of deflation*

I did not see the word "deflation" mentioned a single time above. Many economists warn it could be coming (in fact Canada currently does read negative inflation).

Japan had a scenario like the one we're in, and quite a long period of deflation. A yield like 1% in fixed income is not necessarily a poor real return in a deflation scenario. Japanese bond funds provided quite reasonable returns ever since the 90s. Starting in the late 90s, Japanese bonds dropped sub 2% and then sub 1% yields. This provided something in the 1% to 1.5% nominal CAGR for bond funds, which with inflation between 0% and 1%, was a reasonable real yield, possibly even a positive real return.

In other words, fixed income investment in Japan worked out quite well. And it provided rock solid stability, even while stocks performed terribly.

*2. Bond funds are portfolios which adapt to rates*

The initial argument completely misses the fact that bond funds (just like GIC ladders) are portfolios which continually adapt to interest rates of the day. I do agree that retirees should stick to closer maturities. Let's say the retiree is at 5 year avg maturity using a mix of XBB + XSH. We have no idea where interest rates will go. What if interest rates start rising? The bond funds adapt to this, and before you know it your bond fund(s) or GICs are generating a higher rate of return. Maybe rates creep upwards from here towards 4% or something reasonable.

Rising interest rates, plus shorter maturity bond funds, is a great scenario. You will suffer some volatility and drawdown, but by the time you hit X years (say 5 years) the volatility is ancient history, and you're getting higher rates of return.

IMO ditching bonds now is an attempt to time the bond market and time interest rates. It's very hard to time markets. Better thing to do is reduce maturity, but don't go too short. Remember, a lot of people think interest rates are going to rise any moment. And if they do ... at something like 3 year, or 5 years, or 7 years avg maturity, you'll be in a great position.


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## james4beach (Nov 15, 2012)

pwm said:


> I don't hold any bonds or bond funds, however I do hold a cash reserve in HISAs.


Right, you need cash, probably enough to pay several years of expenses. But would you also not satisfy your cash needs if you had it laddered in 1 year GICs? Each GIC would mature and provide cash that you need, so it wouldn't matter if you kept some of it locked away. It's a viable replacement for cash and provides higher returns.

Now extend that line of thinking...

What if you were in a ladder of 5 year GICs? It could satisfy your liquidity and you get a higher yield due to going to longer maturities. I realize the yield curve is very flat, but in general you will get higher yields at 5 years than cash. e.g. Outlook GICs yield 2.0% whereas HISAs yield 1.6% if you're lucky.

Now what if you nudge that to 7 year instruments, laddered? Well buddy, this is a bond fund.

My point is that bond funds or GIC ladders ARE substitutes for cash. There is very little difference between a ladder of 1 year GICs and a bond fund, other than the term lengths.


Myself: I'm semi-retired and have a fixed income portfolio with a weighted average maturity at 7 years. This includes GICs and some bonds as long as 30 years to maturity. But they are all laddered and staggered, so that in any given year, something is always maturing. This will provide all the cash I need, and on average over time, I will get higher returns than cash.


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## AltaRed (Jun 8, 2009)

FWIW, I did not mention preferreds because that is a highly active subject unto itself as we well know from the numerous discussions on this forum. That said, James mentioned deflation. Well, there is nothing better than a perpetual preferred in a deflationary environment. The dilemma, of course, for retirees with perpetuals is long term interest rate sensitivity AND being caught on the wrong side of the yield curve when any such perpetuals must be sold to fund expenses OR by the Executor upon death.

However, for retirees who might be able to ride out the rest of their lives with a 4-5% yield alone in their portfolios, perpetual prefs are a legitimate component of that portfolio.


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## Topo (Aug 31, 2019)

The classic 60/40 portfolio is not necessarily the most appropriate portfolio for most retirees. "Age in bonds" or something close to that would be more appropriate, although there are exceptions. The 60/40 portfolio has historically had the best risk-adjusted return. It is possible that going forward there will be a shift, and for example 80/20 or even 95/5 would have the best risk-adjusted return. But most retirees should not try maximizing profit, but rather manage risk. For an 80 year old today, it does not matter much if stocks crush it in the 2040s. It is all about this and the next decade. 

Maybe going from 20/80 to 40/60 would help with returns and mitigating some risks (such as inflation), but that does not have to be done using Unilever or any other dividend stock. A stock index fund would do the job too. No point in advocating dividend stocks as bond substitutes, which could suggest it is okay to have a 100% stock portfolio (tilted to dividend payers).


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## agent99 (Sep 11, 2013)

AltaRed said:


> Those of us discussing this subject, and who have DB pensions covering some/all of our basic living expenses, should qualify our responses accordingly because annuity payments are really guaranteed fixed income.


This is true and always a problem when discussing general subjects on these forums.

Personally, I have no real pension income. Just some beer money from a company I worked for early on. But most of us do have CPP and OAS. For a couple, this can be about $35k. This is like an indexed annuity, so perhaps that should be built into those equity/FI ratios.

For a couple aged 65, present value of CPP/OAS could be in the $500-$600k range. Say $500k. They could have $750k in equities and that would provide the 60/40 ratio for a total portfolio of $1250k. Income $35k + return on equity portion. I wouldn't advise that!

We used to be told that we should have our age in fixed income - 65% FI at age 65. For that same $1250k portfolio, FI should then be $812.5k. Deduct the $500k CPP/OAS value, so $312.5k FI. Equity $1250k-$812.5k= $437.5k. Total savings needed same $750k, Income $35k + return on roughly 60/40 Equity/FI investments (like many balanced funds)

So perhaps for a couple with almost full CPP/OAS benefits and no DB pension, using the current 60/40 ratio at retirement age is about right? Maybe revisit every few years and reduce equity exposure?

Not addressed here, is where the investment classes should be and how to minimize affect of taxes.. Funds in RRSPs and RRIFs are taxed on withdrawal. Each case different because of varying amounts that are in registered accounts.

Also not addressed, are DB pensions. But similar math could be done to include present value of those.

For those of us not using a balanced ETF or Mutual Fund, we still need to decide on just what the FI component should be. No low yield gov bonds? Maybe higher yielding GICs? Otherwise Corporates of Prefereds with added risk?


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## AltaRed (Jun 8, 2009)

Topo said:


> The classic 60/40 portfolio is not necessarily the most appropriate portfolio for most retirees. "Age in bonds" or something close to that would be more appropriate, although there are exceptions. The 60/40 portfolio has historically had the best risk-adjusted return. It is possible that going forward there will be a shift, and for example 80/20 or even 95/5 would have the best risk-adjusted return. But most retirees should not try maximizing profit, but rather manage risk. For an 80 year old today, it does not matter much if stocks crush it in the 2040s. It is all about this and the next decade.
> 
> Maybe going from 20/80 to 40/60 would help with returns and mitigating some risks (such as inflation), but that does not have to be done using Unilever or any other dividend stock. A stock index fund would do the job too. No point in advocating dividend stocks as bond substitutes, which could suggest it is okay to have a 100% stock portfolio (tilted to dividend payers).


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 slightly higher equity percentages due to the widening of the gap between bonds and equity risk premiums.

My view is there is no one right answer these days. It is highly situational on what the portfolio needs to deliver to meet cash flow needs. IF that is 4% as in SWR, that isn't likely going to happen in the near term at least with a 60/40 portfolio. 

Justin Bender did some recent work in a YouTube video and put it in the context of Vanguard AA ETFs: Using 1.4% inflation, the expected nominal (and real) returns are: VCIP 1.9% (0.5%), VCNS 2.7% (1.3%), VBAL 3.6% (2.2%), VGRO 4.5% (3.1%), VEQT 5.4% (4.0%). Or if you don't like the apparent accuracy of such an exercise, just call it 2%, 3%, 4%, 5% and 6%.


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## james4beach (Nov 15, 2012)

The bond weighting is also important for the psychological effect of volatility reduction, which will never enter into the quantitative analyses.

VGRO's 3% real return sounds pretty great until you freak out one day and liquidate it all, which is what people tend to do during turmoil. So while I agree that the more aggressive asset allocations (less bonds) provide theoretically better returns ... reality can be quite different once you consider human behaviour. Volatility and drawdowns matter to most people, and causes people to touch, trade, shift in & out, and do other harmful things.

Two of my close friends (one in his 30s, another in 40s) with equity-based portfolios liquidated and sold everything during the COVID crash due to, essentially, panic of the magnitude of the catastrophe. And this wasn't even a giant drawdown, only about 30%. A bad crash can easily be 50% or 70%, much worse than we got this year.

I did not sell. My high fixed income allocation really smoothed things over.

So who is better off? There's more going on than just projected real returns. Especially if a retiree has ALL their capital in their own hands (no pension) I think it's even more important to design the portfolio conservatively because you can't afford to screw things up based on emotion and fear. I'm 50% in fixed income and would not dream of going any lower.


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## AltaRed (Jun 8, 2009)

james4beach said:


> So who is better off? There's more going on than just projected real returns. Especially if a retiree has ALL their capital in their own hands (no pension) I think it's even more important to design the portfolio conservatively because you can't afford to screw things up based on emotion and fear. I'm 50% in fixed income and would not dream of going any lower.


That is why a retiree might annuitize a portion of their portfolio at age 75 or 80 as well. To get both a steady monthly paycheck plus longevity insurance. Though now is not an ideal time for annuitizing with interest rates so low.


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## Topo (Aug 31, 2019)

AltaRed said:


> 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 slightly higher equity percentages due to the widening of the gap between bonds and equity risk premiums.
> 
> My view is there is no one right answer these days. It is highly situational on what the portfolio needs to deliver to meet cash flow needs. IF that is 4% as in SWR, that isn't likely going to happen in the near term at least with a 60/40 portfolio.
> 
> Justin Bender did some recent work in a YouTube video and put it in the context of Vanguard AA ETFs: Using 1.4% inflation, the expected nominal (and real) returns are: VCIP 1.9% (0.5%), VCNS 2.7% (1.3%), VBAL 3.6% (2.2%), VGRO 4.5% (3.1%), VEQT 5.4% (4.0%). Or if you don't like the apparent accuracy of such an exercise, just call it 2%, 3%, 4%, 5% and 6%.


I don't dispute that stocks have a higher expected return than bonds. But for a retiree, what matters is the SWR of their portfolio. The SWR is influenced as much by volatility than returns. Using Portfolio Visualizer's Monte Carlo simulations, in the past one could have taken a 4% withdrawal for 30 years from a bond only or 60/40 portfolio with a success rate of more than 95%. With a 100% stock portfolio, the SWR would have to drop to 3% for a similar success rate. 

It is likely that the SWR will be lower in the future, but it is safe to assume a more volatile portfolio will have a lower success rate. The role of bonds is to dampen volatility.







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## james4beach (Nov 15, 2012)

Topo said:


> I don't dispute that stocks have a higher expected return than bonds. But for a retiree, what matters is the SWR of their portfolio. The SWR is influenced as much by volatility than returns.
> . . .
> It is likely that the SWR will be lower in the future, but it is safe to assume a more volatile portfolio will have a lower success rate. *The role of bonds is to dampen volatility.*


Volatility is more harmful than most people think. It's harmful both from an emotional angle, but also -- as you point out -- for sequence risk and the impact on SWR.

I strongly believe that retirees (with no pension/annuity) need a healthy allocation to bonds. This can mean lower maturity bonds and/or GICs.


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## AltaRed (Jun 8, 2009)

Topo said:


> I don't dispute that stocks have a higher expected return than bonds. But for a retiree, what matters is the SWR of their portfolio. The SWR is influenced as much by volatility than returns. Using Portfolio Visualizer's Monte Carlo simulations, in the past one could have taken a 4% withdrawal for 30 years from a bond only or 60/40 portfolio with a success rate of more than 95%. With a 100% stock portfolio, the SWR would have to drop to 3% for a similar success rate.
> 
> It is likely that the SWR will be lower in the future, but it is safe to assume a more volatile portfolio will have a lower success rate. The role of bonds is to dampen volatility.


That is why one goes with a modified 4% SWR (based on portfolio value at the beginning of each year). Better yet, adopt Variable Percentage Withdrawal methodology, enjoy higher withdrawal rates and never run out of money. Course one has to accept variable annual amounts with either modified SWR or VPW methodologies. Just like 'Age in Bonds' is dumb, so is the inflexible 4% SWR. Old habits die hard.


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## Topo (Aug 31, 2019)

AltaRed said:


> That is why one goes with a modified 4% SWR (based on portfolio value at the beginning of each year). Better yet, adopt Variable Percentage Withdrawal methodology, enjoy higher withdrawal rates and never run out of money. Course one has to accept variable annual amounts with either modified SWR or VPW methodologies. Just like 'Age in Bonds' is dumb, so is the inflexible 4% SWR. Old habits die hard.


I like VPW myself, but it is no panacea for volatility either; in practice it allows one to take more from the portfolio than SWR. This of course leaves less unspent funds in the portfolio if one lives long enough.

If you have a 1m stock portfolio you can take 50k this year (for example). If stocks drop 50% next year due to COVID-21, under VPW, you will have to take only 25k. You have to be comfortable with that kind of volatility in withdrawals.


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## AltaRed (Jun 8, 2009)

Indeed. One trades variablity in withdrawals with a general higher overall withdrawal rate. Just like RRIF minimum annual withdrawals Both based on similar methodology. Recognize this methodology assumes one dies broke at 100. Want a buffer? Keep some cash aside in a 'cash reserves' account or use the percentages for a higher FI allocation, e.g. 40/60 instead of 60/40.


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## hfp75 (Mar 15, 2018)

j4b makes a good point, that bonds are not only an investment vehicle where you expect a real return that is positive. It acts as ballast during turbulence, much like a keel on a sail boat !

Maybe this whole time our expectation of a positive real return from bonds was partially flawed, should the return be only 1/3 of the value and 2/3 be the stability offered by bonds ? Seeing it as not highly corolated with stocks....

If over the next few years bonds are low to neg real return and markets are very turbulent, is the bond roll more to offset turbulence at the cost of 1% ? If at the end you can’t stomache a 50% draw down, and sell or bubbles pop, either way markets could be less in 5 years for high equity investors. The bond investor would have lost too but the losses would have been less and getting there would have been less volatile too.... we have not had such a long draw down but one can never say never.....

I do wish bonds were more promising but......


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## pwm (Jan 19, 2012)

I like perpetual prefs. Just did a Quicken report which shows they constitute ~ 12% of my investment portfolio.

Mostly GWO, Royal Bank, Power Corp, & Power Financial.


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## agent99 (Sep 11, 2013)

AltaRed said:


> 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 slightly higher equity percentages due to the widening of the gap between bonds and equity risk premiums.


It wasn't necessarily "age in bond" stuff. More likely "age in fixed income".

As I tried to point out above, it could still be a valid rule. Sources of fixed income other than those from investments should be considered before deciding on allocation ratios. Everyone seems to be ignoring this, although it is a key factor. Some Reading.


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## agent99 (Sep 11, 2013)

pwm said:


> I like perpetual prefs. Just did a Quicken report which shows they constitute ~ 12% of my investment portfolio.
> 
> Mostly GWO, Royal Bank, Power Corp, & Power Financial.


I only recently started to add preferreds. My total is now about 11% of which about 1/2 are perpetuals. Others a mix of Minimum resets and straight resets, fairly carefully chosen! 

I do have one from Power Financial - They said they may call those? Probably when it suits them


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## james4beach (Nov 15, 2012)

Before swearing off bonds entirely, consider the possibility of deflation. We have no idea what the future will bring ... the deflation protection offered by bonds could turn out to be very valuable. Shouldn't you have at least some allocation to bonds to benefit from this protection? We are potentially looking at some powerful deflationary forces right now.

Bonds were a great investment in Japan, even at low yields. And here's Buffett talking about bonds in deflation.


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## Gator13 (Jan 5, 2020)

The dividends, distributions, etc that your portfolio produce must be taken into account.

I am more in the camp of 85/15 with the 15 being cash reserves/float.


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## :) lonewolf (Feb 9, 2020)

People panic not the market. People can panic in any market


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## dBII (Mar 12, 2013)

I'm not understanding something that might be right in my face. Real return over one year for XBB is 5.7% including distributions. That seems like a fairly decent rate , and it has been like that for a very long time especially considering it is fairly low risk. Balanced Mutual Funds like Mawer have also had steady gains, mostly because they invested in long term CSB's bought when rates were higher, but are still providing cash-flow into the distributions. Mawer's bond funds have returned very good returns as well. Has something changed that means it's time to dump balanced funds and bond ETF's/MF's?


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## james4beach (Nov 15, 2012)

dBII said:


> I'm not understanding something that might be right in my face. Real return over one year for XBB is 5.7% including distributions. That seems like a fairly decent rate , and it has been like that for a very long time especially considering it is fairly low risk. Balanced Mutual Funds like Mawer have also had steady gains, mostly because they invested in long term CSB's bought when rates were higher, but are still providing cash-flow into the distributions. Mawer's bond funds have returned very good returns as well. Has something changed that means it's time to dump balanced funds and bond ETF's/MF's?


There is no problem with the recent return including the last year; it's been amazingly good. The issue is the projection for returns going forward.

Bond funds (XBB or Mawer Balanced are same kind of thing) have a return that is about equal to the current yield-to-maturity of their portfolios. Currently this number is only around 1% to 1.5% which means that over the next decade or so, you can expect to get roughly 1% annual return. This is a pretty safe assumption because the way bond funds work, the future returns (over next 10 years) correlate very strongly to yields of today.

The past returns don't tell us anything about future returns. The *best estimate* for future returns of these bond funds is about 1% return for the next decade.

That's what people have a problem with. It doesn't really bother me though, because bond funds are still more stable than stocks, and help in asset allocation (reduce volatility of the portfolio). Plus, bonds could still outperform stocks over the next decade, even at just 1% return. We can't predict the future and we might be headed for deflation, in which case bonds could outperform.

I absolutely would not hold just a bond fund on its own, as a solitary investment. The projected returns are too low. This is why I hold stocks + bonds + gold.

But let's be clear: you will not see a return like 4% or 5% going forward in a bond fund, over the next decade. Those days are in the past.


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## hboy54 (Sep 16, 2016)

I would think that some people would invest in their infrastructure instead of bonds at 1% for a decade. A PV system could return 2 or 3%. Or add insulation on the house. Or a greenhouse to grow some food. I am considering all 3, though the PV system is more to run the greenhouse and for emergency backup to keep the water pump and refrigeration going, about 3kWh/day summer, half that winter.


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## james4beach (Nov 15, 2012)

No question @hboy54 there are many good ways a person can invest in themselves or their properties. I plan to also invest in my own business.

Focusing on market portfolios, I claim that "the whole is greater than the sum of its parts". By this I mean that a diversified portfolio which includes bonds has nice characteristics that are beneficial. The *portfolio as a whole* performs and behaves in a good way, and this is more important than the individual behaviour of stocks or bonds if treated separately.

I really wish I understood this concept 20 years ago when I started investing. Instead, I spent too much time agonizing over each particular asset.

The criticisms of particular assets _in isolation_ are valid criticisms. But when baked into a portfolio, something different emerges because you're dealing with the interplay between different assets, including rebalancing opportunity and different patterns of behaviour.

In systems theory and philosophy, this effect is called "emergent behaviour".

For people who feel a lot of grief about holding bonds, I strongly encourage you to revisit this analysis from the perspective of the whole portfolio.


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## MarcoE (May 3, 2018)

What James said is correct. People need to consider investor psychology. During the next stock market crash, how will you behave?

During the recent Covid crash, when the stock markets dropped by a third, my own portfolio suffered relatively mild losses. This is because I keep my stock allocation between 30-35%. A strong bond and gold component helped me during the crash. And even those mild losses were no fun!

If I was heavier in stocks, how would I behave and feel? If I saw my portfolio (which took a decade of work to build) cut by 30-40%, how would I react? Would I panic and sell? Or would I just feel depressed and discouraged, which could negatively affect my health? Would it affect how I act in my small business? Would it cause me to make bad decisions in other areas of life, due to stress?

I don't know. How YOU react depends on your personality, job stability, age, net worth, spouse's income, and other factors. Personally, due to my own situation, I can't handle big crashes. Even if they're temporary.

And Covid's crash was relatively mild and short. What happens next time there's a major crash? How would it affect my mental and physical health, relationships, my ability to run my small business, and so on? I don't know. I don't want to find out.

Bonds might only be returning 1%, which stinks. But they can be worth a fortune if they protect you during a stock market crash. If there's a huge stock market crash, and stocks go down 50-70%, and this lasts for ages, yes I'll be buying more stocks during this time -- and I'll also be kissing those 1% bonds.

I think most people overestimate how well they'd deal with crashes. Some people CAN deal with stock market crashes, and that's great. But there's also a survivorship bias involved. Those who sold in a panic and ran from investing aren't posting in this forum.


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## Eder (Feb 16, 2011)

Well the definition of "investing" is :


the act of investing; laying out money or capital in an enterprise with the expectation of profit

I no longer think bonds at 1% qualify as an investment...lets call the act "divesting" perhaps?


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## james4beach (Nov 15, 2012)

MarcoE said:


> Bonds might only be returning 1%, which stinks. But they can be worth a fortune if they protect you during a stock market crash. If there's a huge stock market crash, and stocks go down 50-70%, and this lasts for ages, yes I'll be buying more stocks during this time -- and I'll also be kissing those 1% bonds.


I agree, obviously  You said it well there -- 'they can be worth a fortune if they protect you during a stock market crash'. That's a great point. At first glance they appear to not be worth much due to 1% to 1.5% yield.

But there's actually more value hidden in those bond funds, or GIC ladders:

(a) they reduce volatility and make investing easier, emotionally
(b) provide portfolio stability / smoothing, reducing sequence risk
(c) provide ability to withdraw cash even when stocks are down
(d) give you the option to rebalance back into stocks (buy low)
(e) perform great in the Deflation scenario, which let's remember, is still possible
(f) can give good long-term performance if interest rates later go up
(g) can potentially outperform stocks in a given 5 or 10 year period

For me, this is a lot of value. This value exists whether fixed income yields 6% or 1% or -1% ... just looking at the yield (bond price) seems to ignore all of this value.

We all know equities provide higher performance under normal conditions. When you're 60/40 or 50/50, the idea was always that long-term performance comes from stocks, and that's still the case. The bonds provide other value, as listed above.

I don't buy the argument that anything has changed.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> But there's actually more value hidden in those bond funds, or GIC ladders:
> 
> (c) provide ability to withdraw cash even when stocks are down


All your points are good, but point (c) is very important for those retired investors that choose growth stocks for their equity allocation. People in the accumulation stage often miss this point when they disparage bonds.

Growth stock investors don't enjoy a lot of cash being thrown off their investments and have to sell shares to produce cash flow for expenses. This works great until the market is down and they might have to sell depressed shares. This is when fixed income allocations are tapped until the market recovers.

ltr


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## MarcoE (May 3, 2018)

james4beach said:


> (d) give you the option to rebalance back into stocks (buy low)


This really is a nice feature of a predetermined asset allocation. It "forces" you to buy low.


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## agent99 (Sep 11, 2013)

MarcoE said:


> During the recent Covid crash, when the stock markets dropped by a third, my own portfolio suffered relatively mild losses. This is because I keep my stock allocation between 30-35%. A strong bond and gold component helped me during the crash. And even those mild losses were no fun!


Sorry to read that you have only 30-35% in equity. That would mean that you would not have benefited from earlier gains in stocks. Sometimes being overly conservative may not be a good thing. But it that makes you feel good, stay with your plan.

Overall our 60-70% equity (well into retirement) still shows large capital gains after riding a series of crashes. And it keeps churning out substantial dividends. Panic? Why????


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## AltaRed (Jun 8, 2009)

Different strokes for different folks. For some, large swings in portfolio value are simply not acceptable. On one particular forum, it appears a number of members are 100% GICs and HISAs. If that works for them, no reason for us to chastise that decision. There is a saying: When you have won the game, why keep playing? Stock markets today globally (in aggregate) are still below market highs early this year, so FI is still ahead if measured from market peak.

I am still willing to play, so at 85% equity, I have seen (and so far, survived) the depths of the Mariana Trench back in March, down a number of Model S Teslas at that time This covid thing isn't over yet so I see no basis to feel smug yet.


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## agent99 (Sep 11, 2013)

MarcoE said:


> This really is a nice feature of a predetermined asset allocation. It "forces" you to buy low.


I consider that a negative. I always cringe when I hear "predetermined' when discussing investment plans. 

With no knowledge of what the future may bring, people decide on a predetermined plan. 30/70 equity/fixed income or whatever. 

Can you imagine General motors predetermining that they were going to build 75% full size sedans and 25% pickups and outfit their plants to do only that. Markets change and everyone wants a pickup and those that want a sedan want a small one (like the Japanese build). Maybe not the best example, but you get the idea.

In order to be successful, large companies, small businesses as well as big and small investors need to be quick on their feet and be prepared to change as business/market conditions change. Why lose money on 1% bonds if there is a relatively safe alternative that may earn 5X as much?

Sorry - Getting off soapbox


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## MarcoE (May 3, 2018)

agent99 said:


> In order to be successful, large companies, small businesses as well as big and small investors need to be quick on their feet and be prepared to change as business/market conditions change. Why lose money on 1% bonds if there is a relatively safe alternative that may earn 5X as much?


A predetermined asset allocation is the right approach for many (maybe most) investors like me.

I have no idea what will happen to stocks, bonds, gold, or any other asset class in the future. If I tried to time these things, I'd lose as often as I won. I suspect that many investors are like me.

Furthermore, continuously studying and analyzing the market comes with a significant opportunity cost. That's time I'm not spending earning money in my small business.

For me and many investors, a passive portfolio with a predetermined asset allocation is the perfect solution.

When it comes to bonds specifically: We've already discussed why they might be worthwhile even with humble 1% returns so I won't rehash.


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## james4beach (Nov 15, 2012)

agent99 said:


> In order to be successful, large companies, small businesses as well as big and small investors need to be quick on their feet and be prepared to change as business/market conditions change. Why lose money on 1% bonds if there is a relatively safe alternative that may earn 5X as much?


Except very few people can pull this off in practice. Just about all of those "tactical" mutual funds do worse than the couch potato / passive asset allocation. Hedge funds do worse as well, and hedge funds aren't dummies (see the Buffett hedge fund bet).

There are fleets of PhDs and market experts who try their very best to "be quick on their feet and change as business/market conditions change" ... and yet, they do worse than passive approaches.


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## agent99 (Sep 11, 2013)

I am not surprised at the above response. Investors have been fed those theories for years. Just like that predetermined asset allocation "rule" of age = FI . But it keeps changing? Why would that be? Maybe predetermined doesn't mean the same to everyone?

Another point - Why is 35% equity right for Marco while 85% is right for Altared? There are no 'correct' predetermined rules. People choose their own and smart ones are prepared to change them as the investment environment changes.


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## AltaRed (Jun 8, 2009)

There is no single right allocation simply because AA is situational... in 2 primary ways: 1) at a point in time for each individual depending on their circumstances of age, portfolio size, rate of accummulation (or if withdrawal - withdrawal demands), risk tolerance, etc. and, 2) trends in market dynamics. As those situations change over extended periods of time, so might one's AA, with emphasis on the word "extended". I would suggest that an 'extended period of time' is measured in at least 'several years', not knee jerk reactions to near term market moves. IOW, I would submit nothing has changed enough today from this same date in 2019 to warrant a change in AA if one has had a robust AA in the first place. My AA has not changed for a number of years and I don't forsee it changing for a number of additional years. It is serving me just fine.


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## like_to_retire (Oct 9, 2016)

AltaRed said:


> There is no single right allocation simply because AA is situational... in 2 primary ways: 1) at a point in time for each individual depending on their circumstances of age, portfolio size, rate of accumulation (or if withdrawal - withdrawal demands), risk tolerance, etc. and, 2) trends in market dynamics. As those situations change over extended periods of time, so might one's AA, with emphasis on the word "extended". I would suggest that an 'extended period of time' is measured in at least 'several years', not knee jerk reactions to near term market moves. IOW, I would submit nothing has changed enough today from this same date in 2019 to warrant a change in AA if one has had a robust AA in the first place. My AA has not changed for a number of years and I don't foresee it changing for a number of additional years. It is serving me just fine.


Yeah, I don't see that a lot has changed in the last 5 years with respect to fixed income or equity investing, so my asset allocation has remained fairly constant (although I did rid myself of preferred shares around 5 years ago, but that's another issue).

In the last month I renewed a couple 5 year GIC's, and the interest rate on the maturing units were just about exactly the same as the ones I purchased in 2015. Not much has changed so I'm confused when reading CMF members talking about altering their asset allocation because of these terrible times? There's a reason for fixed income in a portfolio, that hasn't changed.

ltr


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## londoncalling (Sep 17, 2011)

'60/40' portfolios are facing worst returns in 100 years: BofA | Financial Post

Hindsight is great at telling us what we should have done but is not great at telling us what to do in the future. Who would have thought that both bonds and equities would get spanked at the same time? If rates hold bonds should do better going forward but that is not what the current yield curve is showing. I don't hold bonds but may at some point in my investing life. 2022 real returns are negative for most investors no matter the allocation. Curious to see what those that were posting in 2020 think about their thoughts in 2020 in comparison today. My guess is not much different.

Added. Current bond rate activity and impact is rather short term. Most have probably held on for the ride. However, when is the shift going to take place for bonds.


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## m3s (Apr 3, 2010)

londoncalling said:


> '60/40' portfolios are facing worst returns in 100 years: BofA | Financial Post
> 
> Hindsight is great at telling us what we should have done but is not great at telling us what to do in the future. Who would have thought that both bonds and equities would get spanked at the same time? If rates hold bonds should do better going forward but that is not what the current yield curve is showing. I don't hold bonds but may at some point in my investing life. 2022 real returns are negative for most investors no matter the allocation. Curious to see what those that were posting in 2020 think about their thoughts in 2020 in comparison today. My guess is not much different.
> 
> Added. Current bond rate activity and impact is rather short term. Most have probably held on for the ride. However, when is the shift going to take place for bonds.


I wouldn't call it hindsight

Many have been calling this well before the bond crash. Including a guy who was a bond investor for 30 years in Canada. When he started out people were hesitant of bonds when yields were high but lately people assumed bonds were safe even when yield was trash

People are predicting a sovereign debt crisis now - Canada and UK made bail-in legal for a reason


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## londoncalling (Sep 17, 2011)

Point taken @m3s. There were even members here on CMG that raised concerns about bonds and 60/40 for a variety of reasons. I understand why people choose to own them even if it doesn't align with my IPS. What is happening in the UK is totally bonkers. Bailout one minute, Cancelled the next. I haven't paid much attention this week but clearly inept policy making. I fear a sovereign debt crisis but there will be some type of crisis at some point. No sure if sovereign debt crisis is better or worse than any other crisis.


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## m3s (Apr 3, 2010)

londoncalling said:


> What is happening in the UK is totally bonkers. Bailout one minute, Cancelled the next. I haven't paid much attention this week but clearly inept policy making. I fear a sovereign debt crisis but there will be some type of crisis at some point. No sure if sovereign debt crisis is better or worse than any other crisis.


There are now reports of bank bailouts, adding liquidity to bonds, and raising rates at the same time. This is like slamming on the brakes and accelerator at the same time while swerving from ditch to ditch looking in the rearview.

The elders have mixed all their meds and fallen off the rocker. Ben Bernanke winning the Nobel Peace Prize is the cherry on top


__ https://twitter.com/i/web/status/1581032494266454016


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## sags (May 15, 2010)

Yea.....things might get a little rough in Nigeria for awhile.

But if Nigerians open a bitcoin wallet they can save themselves from the oncoming financial peril.


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## m3s (Apr 3, 2010)

sags said:


> Yea.....things might get a little rough in Nigeria for awhile.
> 
> But if Nigerians open a bitcoin wallet they can save themselves from the oncoming financial peril.


Things would be rough for GM employees if the government didn't bail them out

What would they do?


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## sags (May 15, 2010)

They would be collecting a nice top up from the Ontario Pension Guarantee insurance program that they paid contributions into for decades.

After all......that is why people pay for insurance.

GICs looking pretty good now eh ? Way better investment than crypto for sure.

Crypto may not save the Nigerians after all. Crypto is "dirty", "expensive" and "worthless"......says JP Morgan CEO Jamie Dimon.

I think it is a sentiment that most people share.









JPMorgan’s CEO refers Bitcoin as “Dirty” and “Expensive”


The chief executive officer of JPMorgan, Jamie Dimon, has criticized Bitcoin. The executive has referred Bitcoin as “dirty” and “expensive”




www.thecoinrepublic.com


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## m3s (Apr 3, 2010)

sags said:


> GICs looking pretty good now eh ? Way better investment than crypto for sure.
> 
> Crypto may not save the Nigerians after all. Crypto is "dirty", "expensive" and "worthless"......says JP Morgan CEO Jamie Dimon.
> 
> ...


GICs are yielding less than half of inflation before taxes. It's severely negative in real terms. Inflation is not good for GICs at all

Jamie Dimon is also not your friend. JP Morgan, Blackrock, BYN Mellon are all quietly filling their bags with crypto while telling the boomers not to bother. CNBC is basically hyping up exit/entry liquidity for them. Telling the sheep to buy the top (from Jamie) and sell the bottom (back to Jamie)

Meanwhile I am somehow still able to multiply investments during a bear market, albeit smaller scales due to less liquidity.


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## james4beach (Nov 15, 2012)

AltaRed said:


> I would suggest that an 'extended period of time' is measured in at least 'several years', not knee jerk reactions to near term market moves. IOW, I would submit nothing has changed enough today from this same date in 2019 to warrant a change in AA if one has had a robust AA in the first place. My AA has not changed for a number of years and I don't forsee it changing for a number of additional years. It is serving me just fine.


I agree. One should choose their asset allocation (which may include bonds) based on the long term characteristics of these things. It would be a mistake to be overly focused on a very narrow period -- like "only 2022" when making these kinds of decisions.

I don't see any reason to change my allocation either, and still have 50% in fixed income. A combination of bonds and GICs.

Changing one's strategy every few years is a dangerous game. Often what happens is that the market inflicts enough pain on people that they "capitulate" and change strategies. People usually change strategies at the worst possible time.



londoncalling said:


> Who would have thought that both bonds and equities would get spanked at the same time?


It was always a risk and it's happened before. 1994 was a year when both stocks and bonds were weak (and bonds had negative returns). Also in 2015 and 2018 both stocks and bonds were very weak. For example in 2015, from Feb - Nov, the TSX was down by several percent while bonds (ZAG) was down several percent as well. So it's not exactly *that* unheard of.

Another thing to consider is that if inflation really remains out of control, then stocks are likely going to keep getting nailed. An investor today might ultimately do better in bonds than stocks over the next 10 or even 20 years. There's no way to know.

Diversification into distinct assets (like stocks & bonds) does not guarantee you a painless investing experience. It just spreads out your bets so that your whole portfolio isn't vulnerable to a single thing. On average, over many years, this will provide a smoother investing experience.

It won't be smooth every year though.


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## james4beach (Nov 15, 2012)

For those who are REALLY concerned that 60/40 is not safe enough you can always enhance the diversification across even more assets.

Personally I think that gold is the easiest way to do this. Over the last year, CGL.C (which holds gold bullion) is up 1.7% while both stocks and bonds are down 13% each. So this last year has been a demonstration of the benefits of combining stocks + bonds + gold.

But before you go modifying your portfolio, you've got to think really hard about whether you are going to be able to stick with your choices over the long term. Here is a list of various different assets some people hold in their portfolios. Whether or not these are good ideas is up to you but personally I would stick with the asset classes near the top of the list.

Stocks
Bonds
GICs [NL]
Cash
Gold
Commodities
REITs
Real estate [NL]
Active quant/hedge fund, e.g. DBMF [HF]
Private equity [NL] [HF]
Crypto

[NL]=not liquid , [HF]=high fee


There are some famous people who recommend heavy diversification across many assets like these, notably Ray Dalio and Larry Swedroe. However, one should beware that adding more assets makes your portfolio more complex (and more difficult to manage) and doesn't necessarily improve it that much. Stocks and bonds, like 60/40, is a first step in diversification and may be good enough. I go a bit farther and also add GICs and Gold. Additionally most of us here at CMF already have Commodities exposure with our TSX holdings.


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## Tostig (Nov 18, 2020)

Gold and silver have their ups and downs this year just like everything else. I sold my silver etf and made 10%. But considering I could have made 20% or 30% in 2020 or just at the beginning of the Russian invasion if Ukraine, my annual return on the silver etf over that two years is about 4%.

So bonds are down? So are stocks. Good buying opportunities for both if you had cash reserves. New issue bonds and GICs are paying good % interest. Bond prices being down mean that yields are higher than before.


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## londoncalling (Sep 17, 2011)

james4beach said:


> For those who are REALLY concerned that 60/40 is not safe enough you can always enhance the diversification across even more assets.
> 
> But before you go modifying your portfolio, you've got to think really hard about whether you are going to be able to stick with your choices over the long term.


Portfolio churn often results in lower returns especially if you are chasing return. However, one should monitor their portfolio and adjust according to their risk tolerance. If one learns they are less risk tolerant during this bear they should adjust their weightings. This may prevent panic selling and incurring large losses. It would be different if bonds were at all time highs and equities were at all time lows. Many did abandon 60/40 to get higher returns over the last number of years. 

The main purpose of my post was to point out that sometimes there is nowhere to hide. That doesn't mean cash out. It is rational that bond returns are down due to previous rates. Going forward yields should climb. Longer term the curve may flatten, steepen or invert. 




Tostig said:


> So bonds are down? So are stocks. Good buying opportunities for both if you had cash reserves. New issue bonds and GICs are paying good % interest. Bond prices being down mean that yields are higher than before.


2022 may be the time for new investors to invest heavily. However, for those who believed last years returns are typical they just got a lesson. However, I like to think longer term 5, 10, 20 years out. I think the current equity bear will be longer than average, which should favour bond returns over the next while. I am looking for ways to save more so that I can invest more. Unfortunately, inflation is not helping.


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## Covariance (Oct 20, 2020)

m3s said:


> GICs are yielding less than half of inflation before taxes. It's severely negative in real terms. Inflation is not good for GICs at all


Seems to be a lot of banter on expected returns after inflation (also known as real return). Such as the above statement.
No one knows what inflation will be - they can only forecast. So whether or not GICs outpace inflation in the years ahead is an unknown. Maybe they will, maybe they won't. I have no interest in the argument either way but thought it worthwhile to weigh in so people are clear on what they are betting on. If one is looking to invest in a five year GIC, the forecast for the next five year average inflation tells them their real return. Today's inflation rate is not it.


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## james4beach (Nov 15, 2012)

Covariance said:


> No one knows what inflation will be - they can only forecast. So whether or not GICs outpace inflation in the years ahead is an unknown.


There's also a big misunderstanding out there about the relationship with inflation. *T-bills and short term bonds have historically kept up with inflation*, as shown in the chart below going back to 1953.

Note that even T-bills (similar to high-interest savings acct) has kept up with inflation!

GICs just about always yield more than t-bills which gives us an extra edge. Therefore it's a pretty safe bet that GICs will keep up with inflation, averaged over time.


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## m3s (Apr 3, 2010)

Covariance said:


> Seems to be a lot of banter on expected returns after inflation (also known as real return). Such as the above statement.
> No one knows what inflation will be - they can only forecast. So whether or not GICs outpace inflation in the years ahead is an unknown. Maybe they will, maybe they won't. I have no interest in the argument either way but thought it worthwhile to weigh in so people are clear on what they are betting on. If one is looking to invest in a five year GIC, the forecast for the next five year average inflation tells them their real return. Today's inflation rate is not it.


You mean timing the GIC market perfectly? Heck if you have liquidity and ability to do that there are other things to time

GIC rates are less than inflation, lag inflation, and I bet drop fast if/when inflation does. You have to account for losing 8% purchasing power and how long it will take to recoup that loss while earning negative in real terms before taxes

I have yet to see GIC rates be above inflation so they may never recoup that loss. Banks set the rates and the house always wins. I'd rather buy bank stocks


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## MarcoE (May 3, 2018)

I'm not as smart as the others commenting here. I just love seeing everything (other than gold) go down. I feel like a kid in a candy store and everything is on sale. I hope the prices drop even lower and stay low for years. Inflation is concerning. I hope interest rates go up some more -- that will push stocks and bonds down even lower (better for me as a buyer), increase bond rates (again good for me), and hopefully help fight inflation. Ultimately I can't control any of this, so I'm just sticking to my asset allocation, which I determined years ago, and am just buying more when I can. But I'm still about 25 years away from retirement age. Were I retired and selling my portfolio for living expenses, I wouldn't be as happy right now.


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## james4beach (Nov 15, 2012)

MarcoE said:


> Ultimately I can't control any of this, so I'm just sticking to my asset allocation, which I determined years ago, and am just buying more when I can. But I'm still about 25 years away from retirement age. Were I retired and selling my portfolio for living expenses, I wouldn't be as happy right now.


I totally agree! We can't control this stuff, and I doubt we can predict inflation either. Best to stick with the asset allocation... buy what you can.

It's a much harder situation for retirees though. My parents are in that boat and I feel for them. It's not great to see their equities plummeting like this. I pushed them pretty hard to keep a significant $ amount in savings accounts and GICs though. I think the key for a retiree is to have enough liquidity (like high interest savings) to ride out maybe 2-3 years of market weakness. I believe @AltaRed has often talked about that.

I might even lend my parents some money this year if their liquidity gets tight, so they can avoid selling off assets at a bad drawdown.


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## AltaRed (Jun 8, 2009)

For us in retirement, having a bit of a safety net helps mitigate potential 'unnecessary' damage done to drawing on distressed assets. This time around it is both stocks and bonds that are distressed at the same time. Behold the beauty of cash and/or cash equivalents to mitigate some/most/all of the potential damage for some period of time.

There is no real magic to 'how much' because it will always be a balance between too much cash being a drag on performance vs not enough to get one through the next 6 months. As James has mentioned, I subscribe to holding 2-3 years in cash reserve to supplement other cash flow (pensions and investment income) to avoid having to prematurely sell distressed stocks and bonds. I have no wisdom on whether 2-3 years is right or not but that amount helps me sleep well at night. I can wait this current debacle through to its end point.


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## Thal81 (Sep 5, 2017)

AltaRed said:


> This time around it is both stocks and bonds that are distressed at the same time. Behold the beauty of cash and/or cash equivalents to mitigate some/most/all of the potential damage for some period of time.


Yes, for a long time I had been procrastinating on holding cash and GICs in my portfolio because of my aversion to them. This downturn has convinced me that there's a place for these assets in my portfolio. I just wish I could go back to 1 year ago and fix things before the downturn!


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## MrMatt (Dec 21, 2011)

Thal81 said:


> Yes, for a long time I had been procrastinating on holding cash and GICs in my portfolio because of my aversion to them. This downturn has convinced me that there's a place for these assets in my portfolio. I just wish I could go back to 1 year ago and fix things before the downturn!


That's why the "correct" process is
1. Develop your plan.
2. Execute plan.

Don't "wait for the market", that's a losing game IMO.
I started increasing my bond portion 1-2 years ago... oh well.


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## AltaRed (Jun 8, 2009)

Thal81 said:


> Yes, for a long time I had been procrastinating on holding cash and GICs in my portfolio because of my aversion to them. This downturn has convinced me that there's a place for these assets in my portfolio. I just wish I could go back to 1 year ago and fix things before the downturn!


To be clear, for those in accummulation with employment earnings being the lifeline, or any scenario in which one is not drawing down invested capital, it is a different story. Only an emergency fund, whether that be cash or a LOC, would be necessary. 16+ years into retirement, there has been only two times where I have turned to my cash equivalents to preserve invested capital: 1) the 2008-09 financial crisis, and 2) 2022-2X. I suspect this time won't be the last before I expire.


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## Covariance (Oct 20, 2020)

m3s said:


> I have yet to see GIC rates be above inflation so they may never recoup that loss.


The historical record for fixed income is positive real returns up until about a decade ago. It remains to be seen whether this past decade is an aberration, or a new normal.


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## MrMatt (Dec 21, 2011)

Covariance said:


> The historical record for fixed income is positive real returns up until about a decade ago. It remains to be seen whether this past decade is an aberration, or a new normal.


I hope the last decade was an aberration of bad policy.


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## m3s (Apr 3, 2010)

Covariance said:


> The historical record for fixed income is positive real returns up until about a decade ago. It remains to be seen whether this past decade is an aberration, or a new normal.


Not only does the inflection have to happen, but do so for 10 years just to break even after 10 years of negative real returns

I get the purpose but in most cases I would rather give up negative real returns for liquidity of cash in case of better opportunity - better rates even


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## james4beach (Nov 15, 2012)

james4beach said:


> For those who are REALLY concerned that 60/40 is not safe enough you can always enhance the diversification across even more assets.
> . . .
> 
> Stocks
> ...


Earlier I listed a bunch of assets (above) for potential diversification. I invest in the first 6, which I think is enough diversification (how many do you really need?). I also continued to invest in bonds, and have been steadily buying bonds and GICs all year.

I am curious if anyone here has taken a closer look at the quant or hedge fund strategies like DBMF. The hedge funds have been around for ever, but an interesting development in the last few years is that hedge funds have started appearing in ETF form with much lower fees. For example DBMF is an active currency and commodity trend following approach at 0.85% MER. That fee is high, but similar trend trading hedge funds in the past have charged well over 2% fees.

I have no plans to buy it any time soon, partly because it was way too popular last year. The ETF has grown to $1 billion in assets and there's no way I will jump into something that's so "hot". However, I will keep an eye on it in the next few years.

Again just curious if anyone else has looked into it. DBMF is a quant hedge fund, based on software, which monitors the forex & commodity markets for trends. They try to jump on board trends. My main concerns are (1) I'm not convinced this would generate a long term _real return_ because it's just speculative trading and (2) it's software-based, and we have no idea how good the software is. Hedge funds have been known to collapse because of badly written software/models.

OTOH, it had a fantastic year in 2022 because it successfully went short currencies like Euro & Yen and I thought that was pretty cool. *But is there reason to believe it can successfully repeat such successes and produce a real return over the long term?*


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