# How much bonds do you hold in your portfolio?



## Juggernaut92 (Aug 9, 2020)

Hello All,

I was curious to know how many people, who are retired or close to being retired, hold bonds in their portfolio. Also, how much of a percentage do you hold in fixed income? I posted this in the retirement section as I wanted to get some feedback from people who are already retired or close to it. People keep bringing up the concern that bond yields are quite low these days. Did people change their strategies to adjust to that?

Lastly, if you do hold bonds are you comfortable with how much the yield is?

Any feedback would be appreciated.


----------



## james4beach (Nov 15, 2012)

Juggernaut92 said:


> I was curious to know how many people, who are retired or close to being retired, hold bonds in their portfolio.


You could say I'm semi-retired. At times I'm living off employment income, other times off investment income.

I hold 50% in fixed income, a mix of GICs, government bonds, and XBB.



Juggernaut92 said:


> Lastly, if you do hold bonds are you comfortable with how much the yield is?


Yes I'm comfortable with my bonds and their yields, for 3 reasons.

Reason #1 - the yield is really not as low as people seem to think because it's all relative to inflation. XBB has a yield to maturity of 1.7% and some GICs yield even more. The Canadian inflation rate is 1.1%. This gives a "real yield" of around *positive 0.6%* which is quite comparable to previous yields, as far back as my records go, around 2013-2014. The yield in fixed income today is about the same as it was in previous years, in "real" terms.

Reason #2 - the fixed income portion of the portfolio is meant to give stability. Fixed income still gives stability, even if it yields nothing. And I don't hold these GICs and bonds for high performance... that's what the stocks are for. So the stocks contribute performance, and the fixed income contributes stability.

Reason #3 - you can't time the bond market. Everyone seems to understand this for their stock components, but not for their bond component. In the stock market, sometimes valuations get too high, or performance sometimes stinks. Stocks are not always a "good deal" but the best approach is to hold them passively, long term, because (a) it's very hard to know when they are a good/bad deal, and (2) you want to get their long term returns. The exact same thing is true for bonds & fixed income. We don't actually know if bonds are a "good" or "bad" deal today. If negative interest rates are around the corner, then *bonds are a fabulous deal* today. But in any case, even if your bonds do poorly in the short term, they should do fine in the longer term. Imagine for example that yields gradually move higher in the coming years. In the long term, your bond portfolio will produce better returns.

There's lots of bad advice in the media these days relating to bonds.



Juggernaut92 said:


> People keep bringing up the concern that bond yields are quite low these days.


Actually if you listen to the arguments presented, you will also hear people concerned that bond yields are about to go higher. Some here you have some pundits predicting that bond yields are stuck near zero and will always have poor yields, and _other pundits_ predicting that bond yields are going up -- which means better returns for a long term investor.

It's not even clear to me what I'm supposed to be afraid of.


----------



## Jimmy (May 19, 2017)

It depends on what % of your income is coming from RRIF. I know people in retirement who have no bonds but they have enough to live off in dividends.

If your RRIF is to be the main source of income it is a different story. You don't want to be selling and wdrawing stocks in a recession. It took really 6 yrs to recover from the 2008 recession so you would have been wise to have been selling bonds for the wdrawals in that period.

Assume there are 2-3 recession periods like that in a retirement period of 25-30 yrs so say ~ 1/2 the period. So you really need at least 50% in bonds at 65 I would say.


----------



## agent99 (Sep 11, 2013)

Juggernaut92 said:


> Hello All,
> 
> I was curious to know how many people, who are retired or close to being retired, hold bonds in their portfolio. Also, how much of a percentage do you hold in fixed income? I posted this in the retirement section as I wanted to get some feedback from people who are already retired or close to it. People keep bringing up the concern that bond yields are quite low these days. Did people change their strategies to adjust to that?
> 
> ...


"Experts" used to say that the % of fixed income you should have should be equivalent to your age. For example 65% if you are 65. But that advice has changed over the years. Some now may say 60% equity/40% fixed income. But those numbers really have no strong basis. My own feeling, is that for a couple who are both collecting CPP and OAS, a 60/40 portfolio is probably safe today.

Some believe you should have an amount in fixed income that will cushion any foreseeable major downturn in the equity markets. Lets say you have $1million with 60/40 Eq/FI. Then the TSX drops by 50% If fixed income isn't too badly affected, you may now still have almost $700k invested. But if you didn't have that cushion, you would only have $500k. 

In downturns like that, the actual portfolio value might not be that important if the equity keeps paying dividends. (they usually do, and later the equities hopefully recover) However, if your plan, as some suggest, was to sell off no/lo dividend equity to fund your retirement, you wouldn't be in good shape! Many of us retirees have a high allocation to strong dividend paying equity in our retirement portfolios. 

If you have a pension, that can be considered fixed income. You could work out the present value of your pension payments and take that into account. Then you may be able to have a higher % of equity.

You mentioned bonds, but GICs would fall in same category. Am I happy with the return? No! I still have GICs and corporate bonds, some out to 2024. But as they mature, it is hard to find anything to replace them with, at least on BMOIL, who we use. With yields of <2%, you are hardly keeping pace with inflation. As a result, I have gone to preferred shares. But I don't suggest this until you spend a lot of time understanding them. I also stay away from Bond Funds. Balanced or asset allocation etfs/funds might be an option.

Good Luck, I hope this helps a little. (No pension, and been retired for 18 years)


----------



## AltaRed (Jun 8, 2009)

I am 15 years into retirement. I hold enough fixed income to supplement my other sources of cash flow (equity distributions/dividends, CPP, etc) such that I won't have to sell equities in a bear market, i.e. >20% down, for a period of at least 2 years (at normal ongoing cash flow spending), or circa 5 years if I cut back some discretionary spend. Accordingly, I don't have a percentage allocation to fixed income. It is an absolute amount.

I could also argue that my fixed income component provides some ballast for the portfolio. It doesn't matter that my fixed income may not provide me a real rate of return. I am interested mostly about Return OF Capital. I may not be happy with a 1.5-2% return* currently but it still serves the purpose intended, and it will improve as interest rates start going back up (they already are for GOC5 and GOC10 and for 4-5 year GICs).

* For GICs et al that are rolling over and HISA accounts. My actual current fixed income yield is still higher due to bonds and GICs in my 5 year ladder that have yet to mature.


----------



## pwm (Jan 19, 2012)

Retired 16 years, and no bonds. I consider my perpetual prefs to be my fixed income. Everything else in dividend paying stocks or stock funds.


----------



## Eder (Feb 16, 2011)

I stopped my GIC ladder & other fixed investments untill I can get better than 2%. I have been buying REIT's in lieu of GIC's as they roll over.


----------



## ddivadius (Apr 28, 2017)

james4beach said:


> Yes I'm comfortable with my bonds and their yields, for 3 reasons.
> 
> Reason #1 - the yield is really not as low as people seem to think because it's all relative to inflation. XBB has a yield to maturity of 1.7% and some GICs yield even more. The Canadian inflation rate is 1.1%. This gives a "real yield" of around *positive 0.6%* which is quite comparable to previous yields, as far back as my records go, around 2013-2014. The yield in fixed income today is about the same as it was in previous years, in "real" terms.


I am not sure the inflation that impacts me is 1.1%. I don't believe that rate is realistic. Considering my lifestyle has been very consistent over past 5 years, my costs for food, energy (power/gas), gasoline, property taxes, cable, cell phone, internet, etc.. are up much more than 1.1% per year. I think I would need more like 3 or 4% to breakeven vs inflation that impacts me. Not including any COVID stay at home cost benefits...lol


----------



## agent99 (Sep 11, 2013)

That 1.1% would be after tax. The true inflation rate could be more like 2%, so 3% before tax could be the break even point. You cant get that from bonds or gics these days. But you could from a mix of equities and fixed income.


----------



## Canadafan (Oct 19, 2014)

Juggernaut92 said:


> Hello All,
> 
> I was curious to know how many people, who are retired or close to being retired, hold bonds in their portfolio. Also, how much of a percentage do you hold in fixed income? I posted this in the retirement section as I wanted to get some feedback from people who are already retired or close to it. People keep bringing up the concern that bond yields are quite low these days. Did people change their strategies to adjust to that?
> 
> ...


I have a professionally manged portfolio.
Inside it include an array of "bond funds" : Higher yield ( paid 8% in 2020) and lower stable, 2.5% stuff; The funds themselves include corperate, gov, foreign & domestic bonds.
So a well blended balanced "bond /fixed income portion of my portfolio which is about 40% of the total. The other 60% is equities.
Again accross a very wide range ofsub groupes etc.
Overall perfomance in 2020 was 12.9%...after fees. I was quite please with that.
My fund manger does re-alocate within the defined ranges of fixed income ( bonds) , cash & equities.
Asmentioned, my protection is on the down side: shuld we see a 30% market correction, my drop would be about 60% of that or 24% drop.
When equities get over heated, $ is moved out of equities & into bonds. On pull backs re-balanced again, to take advantage of upside.
my 2 cents worth 
PS I have been with a wealth mangement model for 6 years now & never disappointed.


----------



## prisoner24601 (May 27, 2018)

Great insights. I'm close to retirement and holding about 5 years expenses in short term/corp bond ETF in RRSP accounts. Similar to AltaRed, I view the bonds as a possible source of cash in bear markets. I do worry that it seems low as a FI % of total portfolio but putting more into bonds feels counterproductive to me. I also hold prefs in my non-registered for tax-advantaged cash flow but don't think of this as having the same safety as bonds in a down market period.


----------



## prisoner24601 (May 27, 2018)

Jimmy said:


> It depends on what % of your income is coming from RRIF. I know people in retirement who have no bonds but they have enough to live off in dividends.
> 
> If your RRIF is to be the main source of income it is a different story. You don't want to be selling and wdrawing stocks in a recession. It took really 6 yrs to recover from the 2008 recession so you would have been wise to have been selling bonds for the wdrawals in that period.
> 
> Assume there are 2-3 recession periods like that in a retirement period of 25-30 yrs so say ~ 1/2 the period. So you really need at least 50% in bonds at 65 I would say.


50% might be high since you could recharge your bond holdings between recessions as stocks recover.


----------



## Thal81 (Sep 5, 2017)

I hold 25% bonds. Depending on my mood, some days I feel I should hold more, and some days I feel I should hold none. All I know is I was happy to hold bonds in March 2020. Remember, bonds held better and recovered faster, and we didn't know how long the stock recovery would take.

I intend to leave the workforce after the pandemic and live off my money for a long period (forever?). So I'm juggling with potential bond allocations, either leaving it as is or increasing it a little. At some point I wanted to keep a substantial cash allocation, but math proved that keeping cash beyond 6-month or so of spending isn't a good idea, so I scrapped that.

If yields and interest rates weren't so low, this exercise would be much easier...


----------



## Dilbert (Nov 20, 2016)

At this point we hold zero bonds, but might consider converting a portion of single stocks into an ETF, like VBAL or VRIF once we reach our seventies. For now, we consider our CPP, wife’s pension and upcoming OAS as a stabilizing factor.


----------



## Spudd (Oct 11, 2011)

I'm close to 50 and semi-retired. I aim for 30% in bonds, right now my allocation spreadsheet shows me I am at 28.5%.


----------



## ian (Jun 18, 2016)

Canadafan said:


> I have a professionally manged portfolio.
> Inside it include an array of "bond funds" : Higher yield ( paid 8% in 2020) and lower stable, 2.5% stuff; The funds themselves include corperate, gov, foreign & domestic bonds.
> So a well blended balanced "bond /fixed income portion of my portfolio which is about 40% of the total. The other 60% is equities.
> Again accross a very wide range ofsub groupes etc.
> ...



Very similar situation. Ten years and pleased.


----------



## birdman (Feb 12, 2013)

Juggernaut92 said:


> Hello All,
> 
> I was curious to know how many people, who are retired or close to being retired, hold bonds in their portfolio. Also, how much of a percentage do you hold in fixed income? I posted this in the retirement section as I wanted to get some feedback from people who are already retired or close to it. People keep bringing up the concern that bond yields are quite low these days. Did people change their strategies to adjust to that?
> 
> ...


Married, mid 70's, healthy, active, and retired almost 20 yrs. No bonds and about 65% in GIC's, 25% in stocks, and some sundry all Canadian investments. Smaller defined benefit plan, 1 cpp, 1 small cpp, and 2 oas. No plan to change strategy as portfolio increases every year and we don't have anything we wish or need to spend on.


----------



## milhouse (Nov 16, 2016)

1 year away from retirement.

Non-registered account is all dividend growth stocks and has no fixed income. Looking to derive the base of my retirement income from here.

RRSP mix currently has about 22% of a bond ETF which has been pushed down from my soft 25-30% range. Looking to start drawing from my RRSP annually about a year and a half into retirement to source additional discretionary spending and/or top up base income if my non-registered dividends get cut. As a few others have somewhat similarly stated, my main goal for the bond fund is to serve as a more stable component to draw from instead needing to draw from my equity funds in an equity bear market. However, I'm trying to determine if there might be value in (partially) using a GIC ladder since there's a certain base amount I'm targeting to withdraw annually. 

DC pension mix is currently about 25% bond ETF. Simllar ideas to the RRSP but I can't draw from it until 55. 

TFSA mix currently has about 20% bond ETF. Ideally, my goal for it is longer term growth but I'm looking for it to serve as a partial emergency fund in the unlikely event I need cash and I don't want to take out more from the RRSP/DC pension due to the increased tax hit for the year. As the size of my TFSA grows, I'll let the percentage of the bond mix shrink.


----------



## Benting (Dec 21, 2016)

Retired and no bond and GIC. 100% dividend stock in all accounts. Sell stocks plus dividend to fuel my expense each year.


----------



## james4beach (Nov 15, 2012)

prisoner24601 said:


> 50% might be high since you could recharge your bond holdings between recessions as stocks recover.


What if stocks take 10 years to recover, in a severe bear market?


----------



## AltaRed (Jun 8, 2009)

james4beach said:


> What if stocks take 10 years to recover, in a severe bear market?


Then tap into equities regardless. That is what one would do if they had an 'all in one' VBAL or VRIF or anything else. The strategy is to 'mitigate' the damage, not eliminate it. 

Mr. Google says


> According to a research note from Bank of America Securities, it has taken 1,100 trading days on *average* to regain the territory lost during a *bear market*. There are 252 trading days in a *year*, so that means the *average time* to get back to where we were is 4.4 *years*


Common Sense says


> The Great Depression is obviously the worst offender in terms of how long it took to recoup losses.1 The longest breakeven in the modern era (which I consider the post-WWII time frame) was the aftermath of the dot-com crash, which took four years in total. Surprisingly, the recovery following the Great Recession took just 3.1 years.
> 
> The average breakeven since 1928 was 26 months or just over 2 years. In the modern era, the average was just shy of 17 months or around a year-and-a-half to get back to even. Half of all bear markets have seen breakevens lasting less than a year while one-third have taken 2 years or longer.


So my post #5 of 2 years at current spend and up to 5 years at reduced discretionary spend would be plenty to see one through to a point where one would start tapping into equities and re-building the cash reserve.


----------



## Juggernaut92 (Aug 9, 2020)

@james4beach :I see. I may look into adding some GICs in the future. 


james4beach said:


> The Canadian inflation rate is 1.1%.


hmm really? I thought inflation was on average 2%. Or is that for the US?

You second reason makes sense as i do keep hearing that they should provide stability more than income. Your point about holding bonds for the longer term make sense. 

@Jimmy : I am 30+ years away from being 65 but that is good info. For the previous reason i also do not have an RRIF. Yes withdrawing from stocks during a recession is a bad idea and I think this recession we got lucky and stocks bounced back pretty quickly. 

@agent99 :Thanks for all the good info. I have heard about bonds correlating to your age and using it to cushion your portfolio in a down turn. What are preferred shares? Also, how come you do not have bond funds in your account? is it because they are complicated?

@AltaRed :That is good you hold a lot of fixed income. Using bonds as a ballast makes sense.

@pwm :What do you mean when you say perpetual prefs?

@Eder :Interesting strategy in place of FI

@Canadafan :Hmm are you saying that you have a bond fund where the yield is 8%? Which bond fund is it?


Canadafan said:


> Overall perfomance in 2020 was 12.9%...after fees. I was quite please with that.


That sounds quite reasonable. Can i ask what is the company that is managing the money for you?



prisoner24601 said:


> I view the bonds as a possible source of cash in bear markets


This is a good point. If you have it in a TFSA it can be withdrawn quite quickly.

@Thal81 : 25% is an interesting amount for bonds and have not hear that before. Yes that is the annoying part since cash will just sit there and not make anything. 

@Dilbert : That is a good point about using OAS/pension as your fixed income.

@Spudd : That is a good mix.

@frase :That is a big position in GICs. I do not know much about it but will look into it as I keep hearing it is a good alternative to bonds.

@milhouse :That is a good mix and it is cool you have bonds in different accounts.

@Benting : first time I heard of that when you are retired. I am trying to steadily build up a portfolio of solid dividend paying companies.

Thanks everyone for the input. I am in my late 20s and have plenty of time to decide about my AA but just wanted to hear from others. Will probably look into preferred shares, GICs and adding more solid dividend paying companies to my portfolio.


----------



## agent99 (Sep 11, 2013)

Canadafan said:


> I have a professionally manged portfolio.
> Overall perfomance in 2020 was 12.9%...after fees. I was quite please with that.
> PS I have been with a wealth mangement model for 6 years now & never disappointed.


That 12.9% is quite impressive for 2020. Most balanced funds did not do well at all in 2020, although they did recover. How did your manager manage that yield? Do they have a website?

Our own portfolio never quite recovered to Jan 1st levels. If dividends and interest are dialed in, I think our yield was just under 4%. And I was happy with that! This compared with 20% previous year.

This is from Morningstar:


----------



## agent99 (Sep 11, 2013)

Juggernaut - you asked about preferred shares. The link below would be a good place to start learning about these. But don't jump in until you know how the different types work.

Perpetuals are sort of like bonds, but they have no maturity date. They pay you a fixed percentage until the company decides not to 



https://www.bmo.com/pdf/Understanding%20Preferred%20Shares_E_FINAL.pdf



Regarding bond funds - One negative, is - Why pay fees to a fund to hold fixed income when rates are so low? But there are other reasons. Bond funds have a portfolio of bonds all bought by them prior to when the investor buys. Right now, they will hold a lot of low interest bonds. If interest rates start to climb, what do you thing would happen to bond fund prices? They drop. You may have negative returns for years until they recover. You are better off with a GIC ladder. Buy one 5yr GIC a year, then replace as they mature. That way, you sort of keep up with changing rates.


----------



## AltaRed (Jun 8, 2009)

@agent99: MAW104 had a 10.9% return in 2020. Mawer Balanced A, Fund, performance | Morningstar


----------



## AltaRed (Jun 8, 2009)

Juggernaut92 said:


> @AltaRed :That is good you hold a lot of fixed income. Using bonds as a ballast makes sense.


It is not actually a lot. It gets me 2-5 years of enough capital to supplement cash flow needs for the duration of an equity bear market. A good part of that is HISA savings, with rest being GICs and Corporate Bonds. I also have a bit of Preferred shares (both perpetual and fixed reset) hanging in the wings but I consider them equities, not fixed income.


----------



## prisoner24601 (May 27, 2018)

It would be nice to hear from someone that was newly retired in year 2000 and how they managed cash-flow from their investment portfolio.


----------



## james4beach (Nov 15, 2012)

Juggernaut92 said:


> hmm really? I thought inflation was on average 2%. Or is that for the US?


That was before the economic catastrophe/depression hit. The chart below shows how the inflation rate plummeted to zero once the crisis hit. The chart is from the summer, but it's recently gained a bit more and the most recent figure is 1.1% inflation rate.

Future inflation is notoriously difficult to forecast. But what we know is that someone currently getting 1.7% in a bond fund is beating inflation. Going forward, there are no guarantees.

IMO, bond funds (ETFs) today have perfectly good yields.


----------



## james4beach (Nov 15, 2012)

agent99 said:


> Regarding bond funds - One negative, is - Why pay fees to a fund to hold fixed income when rates are so low? But there are other reasons. Bond funds have a portfolio of bonds all bought by them prior to when the investor buys. Right now, they will hold a lot of low interest bonds. If interest rates start to climb, what do you thing would happen to bond fund prices? They drop. You may have negative returns for years until they recover. You are better off with a GIC ladder. Buy one 5yr GIC a year, then replace as they mature. That way, you sort of keep up with changing rates.


There isn't much of a difference between a bond fund and a GIC ladder. Both are ladders of fixed income securities. The only real difference is that the GIC doesn't have a price, so you don't see the price "fall" as interest rates rise. If the GIC did have a price, it would fall just like a bond.

The banks hide the GIC prices from us, and that makes a lot of people (including me) feel better.

Just as GICs mature and roll over with higher interest rates, bond funds do as well. If you hold a bond fund in a rising rate environment, you won't lose any money -- unless you sell at the lower prices. As each of those bonds mature, they will be rolled over and reinvested at higher interest rates. In the long term, a bond fund will do just fine in a rising rate environment.

Bond funds automatically adapt to rising interest rates. They may show temporary losses (because the prices aren't invisible like with GICs) but the long term returns will improve, which is great.

A bond fund practically guarantees a positive return, even in a rising interest rate environment, assuming you hold it long enough (beyond the 'duration' of the fund). This is because each bond in the portfolio has a guaranteed positive return. It works exactly the same way as a GIC ladder.


----------



## nathan79 (Feb 21, 2011)

Wow, I wish my inflation rate was only 1.1%... LOL.

My down payment savings have lost about 25% of their value over the last 12 months, and that represents a significant portion of my net worth.


----------



## james4beach (Nov 15, 2012)

nathan79 said:


> Wow, I wish my inflation rate was only 1.1%... LOL.


If you think this number is wrong, then I presume it was also wrong when the official inflation number was 2%.

Inflation also varies by region. The published number is the Canadian average.


----------



## Eder (Feb 16, 2011)

My inflation reflects differently than the Canada rate

1.Bakery, meat and vegetables are the leading categories in price increases, with an anticipated price change of 3.5 to 5.5 per cent for bakery items, 4.5 to 6.5 per cent for meat and 4.5 to 6.5 per cent for vegetables.

2.House prices in Canada’s eleven major cities rose by 9.36% during 2020

3. Scotch prices increased average of 8% in 2020.

4.Canada's average new-vehicle transaction price topped $40,000 in December for the first time ever, according to J.D. Power Canada, and that's a 13-per-cent year-over-year increase.

The rest I don't really care about. My personal inflation cost are most likely 7%.


----------



## agent99 (Sep 11, 2013)

AltaRed said:


> @agent99: MAW104 had a 10.9% return in 2020. Mawer Balanced A, Fund, performance | Morningstar


My guess is that those sort of numbers for all of 2020, are as a result of investments outside of Canada. MAW104 has about 50% in US & rest of world. They clearly did do well last year and over the long term. Just a few bad years along the way. No doubt a good choice if regular income is not important and investor has time to reap benefits.
I never get around to buying MAW, but maybe I will add a little in rrifs.


----------



## JMark (Apr 10, 2021)

Juggernaut92 said:


> Hello All,
> 
> I was curious to know how many people, who are retired or close to being retired, hold bonds in their portfolio. Also, how much of a percentage do you hold in fixed income? I posted this in the retirement section as I wanted to get some feedback from people who are already retired or close to it. People keep bringing up the concern that bond yields are quite low these days. Did people change their strategies to adjust to that?
> 
> ...


10%


----------



## AltaRed (Jun 8, 2009)

agent99 said:


> My guess is that those sort of numbers for all of 2020, are as a result of investments outside of Canada. MAW104 has about 50% in US & rest of world. They clearly did do well last year and over the long term. Just a few bad years along the way. No doubt a good choice if regular income is not important and investor has time to reap benefits.
> I never get around to buying MAW, but maybe I will add a little in rrifs.


With CAGR returns in the 8-10% range for whatever 3, 5, 10, 30 year period of time you ever wish to consider, it does not matter if the income yield is zero, 1%, or 2%, one can draw 8% per year by cashing in units and still end up with more capital upon death than one started with. There is not at all shabby. I would expect VBAL to peform in a similar manner over long periods of time.

Like everything else, one would want to keep a bit of cash reserve to smooth out a few single year bumps along the way, not unlike what is being talked about in this thread.


----------



## james4beach (Nov 15, 2012)

Balanced funds are a great way to go, and it's not just Mawer. The PH&N Balanced Fund has

7.5% CAGR over 29 years
7.8% CAGR over 10 years
9.5% CAGR over 5 years
People seem worried that bond yields will be chronically low from now on, which would knock down the bond performance. Even if you subtract 2% annual performance from the bond component (let's be pessimistic), that would only reduce a balanced fund's performance by 0.8% annually which still lands us at ~ *7% CAGR* expected long term return, for a typical, low fee balanced fund.

Is this really so bad? I don't see any reason to abandon a 60/40 approach.


----------



## agent99 (Sep 11, 2013)

AltaRed said:


> With CAGR returns in the 8-10% range for whatever 3, 5, 10, 30 year period of time you ever wish to consider, it does not matter if the income yield is zero, 1%, or 2%, one can draw 8% per year by cashing in units and still end up with more capital upon death than one started with. There is not at all shabby. I would expect VBAL to peform in a similar manner over long periods of time.
> 
> Like everything else, one would want to keep a bit of cash reserve to smooth out a few single year bumps along the way, not unlike what is being talked about in this thread.


As you probably know, I don't buy selling off assets to fund everyday expenses when only other income is from CPP/OAS. Selling off 4 or 5% of holdings in years when MAW has a negative return may work in theory, but at the time you do that, you don't know what the markets will do going forward. It is easy to do using historical figures. Our un-registered accounts yield over 5% (95% dividends), mainly companies that maintain and grow their dividends. No selling required to fund expenses.

If I had as much time and energy as some here, I might look at what would have happened starting in October 2003 when I first started DIY investing (without much of a clue!) How would we have done if I had invested strictly in MAW104 (or even 90% MAW plus 10% GICs) and drawn the amount we did from our amateur mainly Canadian portfolio. Result after about 18 years was that our portfolio has more than doubled in value. 4% growth rate, ~4% annual draw rate. MAW has a return of 8.5% since inception, presumably with distributions re-invested, but that does not allow for annual draw down for living expense. 'Might' be a wash, but I have same feeling about that as self driving cars


----------



## kcowan (Jul 1, 2010)

I had a discussion with my heirs when it was clear I had enough and they confirmed that I should keep invested in equities. I had been retired 5 years when I had that conversation.

We bought a condo in 2007 so I sold $300k in equities. I have also let bonds mature and use the money for living (exceptional expenses). Our RRIFs are 85/15. And we withdraw the standard amount each year (even this year).

In 2019, we doubled the condo investment buying one close to the water and new. Real property is working better than our REIT. Aside from our RRIFs, we hold individual equities. This creates some challenges with accumulated capital gains but we pay the piper as we go to keep the tax burden low in any year. We have averaged 13% net rate while deferring bigger liabilities. (We will increase that in the coming years to reduce those liabilities through gifting and donations.)

Most of the shift to higher equities has been accomplished automatically by the market.


----------



## AltaRed (Jun 8, 2009)

agent99 said:


> If I had as much time and energy as some here, I might look at what would have happened starting in October 2003 when I first started DIY investing (without much of a clue!) How would we have done if I had invested strictly in MAW104 (or even 90% MAW plus 10% GICs) and drawn the amount we did from our amateur mainly Canadian portfolio. Result after about 18 years was that our portfolio has more than doubled in value. 4% growth rate, ~4% annual draw rate. MAW has a return of 8.5% since inception, presumably with distributions re-invested, but that does not allow for annual draw down for living expense. 'Might' be a wash, but I have same feeling about that as self driving cars


MAW104 would have given you ~4% in annual income draw (combination of yield plus sale of units) and ~4.5% growth in NAV since inception. Don't get so hung up on where the annual draw comes from. If it really bothers retirees, then yes, keep a GIC/HISA component to bridge the few years MAW104 was down, replenished thereafter. The math is the math is the math.....


----------



## agent99 (Sep 11, 2013)

AltaRed said:


> MAW104 would have given you 4% in annual income draw (combination of yield plus sale of units) and 4.5% growth in NAV since inception. *The math is the math is the math....*.


Math is math, but your math is not correct........


----------



## AltaRed (Jun 8, 2009)

Whether an investment gives you total return in the form of 8% yield + 0% share price appreciation, or 4% yield + 4% share price appreciation, or 2% yeld + 6% share price appreciation is the same thing on a total return basis. The fund does not care how it gets there. Its CAGR is the same thing.

If one is building a position, then re-investing the dividends compounds per the 3 examples I just used at the posted CAGRs of what ever it is we invest in. Our own CAGRs are different due to, for example, 4% withdrawal, but they apply equally across all three examples however we choose to take that withdrawal.


----------



## agent99 (Sep 11, 2013)

> Our own CAGRs are different due to, for example, 4% withdrawal, but they apply equally across all three examples _however we choose to take that withdrawal._


It makes a difference WHEN we take those returns. 

I am sure you have heard of sequence of returns risk? 

I am watching the Masters golf, but I think I can later determine approximately where I would have been if I had invested in MAW104 instead of doing it myself (if I exclude difference in taxation of capital gains and dividend income).

BTW - For entertainment, read this thread - seems we have been here before


----------



## AltaRed (Jun 8, 2009)

Yes we are arguing about leftovers from a prior battle. Sequence of return issues have never been a factor for me in 15 years of retirement and shouldn't be for anyone else that has a diversified portfolio that provides a balance of income and growth, equity and fixed income. 

We all have holdings which hold during an equity bear and can be tapped into IF we dont otherwise have enough investment income, or cash or FI reserve to tap into. It is really not all that complicated.


----------



## agent99 (Sep 11, 2013)

agent99 said:


> It makes a difference WHEN we take those returns.
> 
> I am sure you have heard of sequence of returns risk?
> 
> I am watching the Masters golf, but I think I can later determine approximately where I would have been if I had invested in MAW104 instead of doing it myself (if I exclude difference in taxation of capital gains and dividend income).


Just for fun, I made up a little spreadsheet.
First found the closing price for MAW104 at end of each quarter from Dec 2003 to Dec 2020.
I assumed a starting amount or $100k on Oct 1 2003 (when I started my own DIY spreadsheet).
I couldn't find the very early distributions, so estimated those based on later ones. (Used 0.9%)
Assumed I sold units each quarter equivalent to 1% of total value at the time. (except less for last quarter when distribution was received).

At the end of Dec 2020, the $100k would have grown to $149k - about 2.4% growth pa. Total of 6.4% IF you can assume annual of 4% can be added. I was surprised that my own amateur mostly Canadian portfolio actually did better ($210k equivalent)! Maybe saving the the Mawer ~1% MER helped. I also had a lower draw than 4% as time went by, so not a precise comparison. I could adjust for that, but that's enough time wasted  I checked that this morning. The MAW104 model I used had total draw of $74284. Prorating to be equivalent, our draw was $91,875.

ADDED: I did a check to see how MAW104 would have done if I had owned it and made the same draws as we actually did from our portfolio. I found that the original $100k would have grown to $127k (vs $210k for our portfolio). Safe but not that great?

I 'may' buy a starting amount of MAW104 and/or a balanced ETF in each of our RRIFs.(or maybe TFSAs). where we don't need any regular cash flow. Not sure how/if MAW can overcome their 0.92% MER vs 0.2% for an etf like Xbal.

Or maybe not. At our stage in life with 10-15yrs horizon, mix of quality Canadian perpetual and rate reset preferred shares with ongoing yield of 5+% on purchase price might be safer bets. But pickings that meet my requirements are thin these days.


----------



## GreatLaker (Mar 23, 2014)

james4beach said:


> What if stocks take 10 years to recover, in a severe bear market?


This image is from another forum, tracking the value of a $1M portfolio withdrawing an inflation adjusted 4%, starting in August 2000. The top image is real (inflation adjusted) and the bottom is nominal. The top line is real return bonds, and the bottom 4 lines are portfolios with various equity / fixed income ratios. It uses FPX indices, and you can see the composition of them near the bottom of the page at this link: FPX Indices.

If a retiree started withdrawals in 2000, any of the balanced and equity portfolios would have between <$400k and ~$650k left after 20 years. Assuming someone retired at 60 and had a life expectancy between age 90 and 100, they have lived 50% to 66% of their retirement, and the portfolio has declined 35 to 60%. Worst case here is used up 50% of your retirement years and only have 40% of purchasing power left. Not many people will live to 100, but I know several people over 90 that are still with it and living well, but not spending a lot of money. In a case like this retirees likely would have cut their spending early when the 2000 and 2008 crashes happened. I have read in a couple of places that the late 1960s and early '70s were the worst time to retire from an investing perspective because stocks and bonds both crashed at the same time as high inflation crushed purchasing power.

Sequence of return risk is a risk for every retiree that needs to draw from portfolio capital, although only a few will ever suffer from its effects. That's the thing about risk though, only a few will experience it, but the consequences can be severe for the small percent that do.

You can see the entire thread on another forum here: The Plight of the Y2K Retiree - Financial Wisdom Forum


----------



## AltaRed (Jun 8, 2009)

I agree Sequence of Returns risk is very real for the few that experience it, but it is mostly a matter of using a bit of common sense in managing it. Arbitrary, inflexible analytical spreadsheet analysis doesn't allow for intuition, judgement or adjustment and that is why one sees results as noted in above posts. In reality, if we were in another 2008/2009, only the 'brain dead' would still be blissfully ignoring the world around them and continuing to take out 4% adjusted for inflation. They would tighten their belts without even thinking about it, even if all they had were annuities, e.g. CPP, OAS and a DB pension.

IOW, SOR risk is quite manageable, at least in part.


----------



## GreatLaker (Mar 23, 2014)

I'm 63, retired at 60, with no pension. My current target is 40% fixed income with about 1/3 of that in 5-year GIC ladders and 2/3 of it in an aggregate Canadian bond ETF. Reasons for that allocation are that 60/40 is a traditional balanced portfolio that has worked for a long time, and 40% fixed income, at a 4% withdrawal rate, gives about a decade of survivability in a really bad market (very crude measure I know, but it's a starting point). My GIC ladder will provide about 5 years of a really skinny budget, and my annual investment income also provides enough to scrape by on (but without much for vacation, travel, hobbies, luxuries etc).

As I become eligible for OAS (next year) and CPP (deferring to 70), I may lower my fixed income to more of a specific dollar amount to fill the gap between desired spending and govt pensions. My portfolio strategy is based on a long look at historical market conditions over the past 50 years, and lots of reading of authors like William Bernstein, Rick Ferri, Jack Bogle, Ben Graham and Charles Ellis. I'm not one to create an income and spending strategy for a possible 35 year retirement based on the market conditions of the last 10 years.


----------



## agent99 (Sep 11, 2013)

GreatLaker said:


> This image is from another forum, tracking the value of a $1M portfolio withdrawing an inflation adjusted 4%, starting in August 2000.
> 
> Sequence of return risk is a risk for every retiree that needs to draw from portfolio capital, although only a few will ever suffer from its effects. That's the thing about risk though, only a few will experience it, but the consequences can be severe for the small percent that do.


Thanks for that - It is interesting. Looking at the nominal lower chart, it looks like the Balanced index just broke even starting where I started Dec 03. In my post about MAW104 with 4% withdrawal rate, it did better than that. Even when using my actual higher withdrawal rate. Our possibly higher risk portfolio fortunately did even better at an overall higher withdrawal rate that varied according to our needs and the market conditions. (Nothing arbitrary, inflexible or blissful about it (if those comments were aimed at me by AR)  )

Regarding sequence of return risk. I imagine many who have to sell equities and make regular withdrawals just to cover their expenses, never really know how much it has affected their portfolio.


----------



## AltaRed (Jun 8, 2009)

Nothing remotely directed at you Agent99 at all. My point was SOR analyses like GreatLaker presented are academic in nature and don't reflect how people ultimately behave in real life. Not that analytics are not a necessary process to go through to understand theoretical impacts but take them with the appropriate judgement.


----------



## agent99 (Sep 11, 2013)

AltaRed said:


> Nothing remotely directed at you Agent99 at all. My point was SOR analyses like GreatLaker presented are academic in nature and don't reflect how people ultimately behave in real life. Not that analytics are not a necessary process to go through to understand theoretical impacts but take them with the appropriate judgement.


Phew - Thanks  I know our withdrawals were based on real retirement life


----------



## james4beach (Nov 15, 2012)

GreatLaker said:


> Sequence of return risk is a risk for every retiree that needs to draw from portfolio capital, although only a few will ever suffer from its effects. That's the thing about risk though, only a few will experience it, but the consequences can be severe for the small percent that do.


Yes, you're right. It's a risk, and is mostly about the dumb luck of when you start your retirement. I would hate it if this happened to me (which is why I use a diversified portfolio of stocks/bonds/gold, which historically has much less volatility and less vulnerability to sequence risk).

I also agree with @AltaRed that a person can adjust their behaviours and reduce their withdrawal amount, to mitigate this problem. It would only be the completely robotic, constant withdrawal strategies which have the worst of the sequence risk.


----------



## Gruff403 (Jan 30, 2019)

Juggernaut92 said:


> Hello All,
> 
> I was curious to know how many people, who are retired or close to being retired, hold bonds in their portfolio. Also, how much of a percentage do you hold in fixed income? I posted this in the retirement section as I wanted to get some feedback from people who are already retired or close to it. People keep bringing up the concern that bond yields are quite low these days. Did people change their strategies to adjust to that?
> 
> ...


Retired for 3 years. No bonds. Age 58. I consider CPP,OAS, Pension to be fixed income portion. RIF &TFSA are 100% equity dividend payers. Current ratio equity to fixed income is 25/75 since in retirement it's about passive secure income. When we collect CPP and OAS in 2-3 years that ratio will change to about 15/85.


----------



## GreatLaker (Mar 23, 2014)

AltaRed said:


> I agree Sequence of Returns risk is very real for the few that experience it, but it is mostly a matter of using a bit of common sense in managing it. Arbitrary, inflexible analytical spreadsheet analysis doesn't allow for intuition, judgement or adjustment and that is why one sees results as noted in above posts. In reality, if we were in another 2008/2009, only the 'brain dead' would still be blissfully ignoring the world around them and continuing to take out 4% adjusted for inflation. They would tighten their belts without even thinking about it, even if all they had were annuities, e.g. CPP, OAS and a DB pension.
> 
> IOW, SOR risk is quite manageable, at least in part.


No spreadsheets were used or harmed during my analysis.    I simply eyeballed the chart to respond to J4B's question. I thought the charts were a good illustration of how bear markets can result in rapid drawdown of a portfolio. I did include a comment "In a case like this retirees likely would have cut their spending early when the 2000 and 2008 crashes happened."

I believe we are saying the same thing. Deep, protracted bear markets can cause a significant and perhaps unrecoverable reduction in portfolio value where the retiree needs regular capital withdrawals. Some type of precaution like a appropriate level of non-volatile assets or reduction of expenditures may be necessary to sustain a retiree's portfolio. An unfortunate number of people that have never thought about this end up capitulating and going to cash, exacerbating the damage that has already been done.


----------



## agent99 (Sep 11, 2013)

GreatLaker said:


> I believe we are saying the same thing. Deep, protracted bear markets can cause a significant and perhaps unrecoverable reduction in portfolio value where the retiree needs regular capital withdrawals.


Deep protracted bear markets would definitely hurt those relying on regular withdrawals from funds that rely on growth. 

However, even when there is no Deep bear market, the regular volatility of the market can reduce the overall performance of balanced funds like MAW104/VBAL when they are used for retirement income (rather than long term accumulation).

In this scenario, most holders would not be trying to time their withdrawals to take advantage of up days in the markets. They wouldn't even notice that the fund performance was affected. But it could be. This is one of the reasons why so many retirees would rather collect steady dividends and not worry about the volatility of their holdings. 

If dividends/oas/cpp fall short of needed expenses, then some selling is no doubt required. Perhaps a partial holding of a fund that can easily be sold in small portions is an option. Just which fund is another question. Ones with low unit prices might work best?


----------



## AltaRed (Jun 8, 2009)

agent99 said:


> If dividends/oas/cpp fall short of needed expenses, then some selling is no doubt required. Perhaps a partial holding of a fund that can easily be sold in small portions is an option. Just which fund is another question. Ones with low unit prices might work best?


It makes little difference which fund or its unit price. Anyone can sell as little (subject to possible minimums) or as many units as they need to do so at an appropriate time. I've never tried to sell 1 unit of a mutual fund so I don't know. Commissions are zero in any event. The truth of the matter is the vast majority of investors have to draw down invested capital as part of their 4% SWR or VPW methodology and the question is some diversification of holdings to provide the flexibility to pick and choose which may be least damaging in a 'down' market.

In the past 10 years, I have sold down units of a legacy TML232 to supplement cash flow needs, partial holdings of MFC, PWF and others in a similar fashion. There is no constraint on how many and when. The key is to have diversified holdings of different asset classes so that one can pick and choose from a position of strength.


----------



## agent99 (Sep 11, 2013)

Alta, what you say applies to mutual funds. When it comes to ETFs or stocks, you can try selling odd lots, but you have no idea of what the fill, if any, might be. If you want to sell 41 or 133 or ??, it might take a while and if not on same day, be charged double fees. The smaller the unit cost, the easier it is to trade in multiples of 100 or even 50. Something other than balanced etfs might fill the bill for this purpose if expected withdrawals are on the small side.


----------



## Jimmy (May 19, 2017)

Interesting article in the Globe and link on the need to rethink asset classes in a rising rate environment

A report from RB Advisors, founded by former Merrill Lynch chief quantitative strategist Richard Bernstein, published a research report highlighting how capital preservation strategies are likely to change/
*
“If nominal growth could conceivably mimic the characteristics of the 1960s or 1970s,* it may be worth understanding what asset classes actually provided a greater degree of capital preservation during those periods … Holding cash was beneficial and duration was penalized as interest rates rose… Small stocks significantly outperformed bonds and provided slightly more downside protection. Although small stocks were hardly a riskless investment, they were indeed superior to bonds in both decades… If the definition of capital preservation is maintaining the purchasing power of the portfolio, then *bonds were a terrible asset class during both the 1960s and the 1970s because the average return was less than the average inflation rate. "*




https://rbadvisors.com/images/pdfs/RBA_Insights_Capital_preservation_04.21.pdf



"Since the 1980s bonds have been considered the cornerstone of virtually every capital preservation portfolio. However, they were a terrible capital preservation investment during
both the 1960s and the 1970s. No combination of stocks and bonds was superior to a combination of stocks and cash during those two decades.


----------



## AltaRed (Jun 8, 2009)

agent99 said:


> Alta, what you say applies to mutual funds. When it comes to ETFs or stocks, you can try selling odd lots, but you have no idea of what the fill, if any, might be. If you want to sell 41 or 133 or ??, it might take a while and if not on same day, be charged double fees. The smaller the unit cost, the easier it is to trade in multiples of 100 or even 50. Something other than balanced etfs might fill the bill for this purpose if expected withdrawals are on the small side.


 I agree it can be a bit trickier to sell odd lots IF it is that important to the investor. In such a situation, I would just use a limit order at, for example, 1-2 cents below the Bid on real time Level 2 trading software and it gets filled. If for example on stock X, Level 2 Bid column may show
300 units @ $17.02
100 units @ $17.01
400 units @ $17.00

If I want to sell 85 shares, I put in a limit order at $17. It will get filled somewhere between $17.00 and $17.02 in a matter of a few minutes (depending on who is aggregating odd lots). Most times it would simply make more sense to sell 100 shares because it is no big deal having an extra $200-300 in cash. Even with stock prices in the order of $100, an extra $1500 is no big deal to round off 85 shares to 100 shares. A Sharpie pen on the back of a napkin is really all that one needs to make the decision on getting the cash one needs.


----------



## agent99 (Sep 11, 2013)

Sharpies? Thanks so much for explaining that


----------



## Juggernaut92 (Aug 9, 2020)

@agent99 :Thanks for the link to the preferred shares. That does sound very interesting and I will look at it more. You make a good point about the bond funds. One thing I dont get is the negative returns of bond funds. If I pay $16/share for a bond fund share and it yields 2.1% and the price falls to $15/share. With the second share price how would i have negative returns? wont the rising yield price compensate for the lowering of share price?



james4beach said:


> Inflation also varies by region. The published number is the Canadian average.


I was going to reply to your other post on inflation rate and then read this. Looking inside the GTA I feel like things have been inflated much more than what the graph is showing.


----------



## agent99 (Sep 11, 2013)

> One thing I dont get is the negative returns of bond funds. If I pay $16/share for a bond fund share and it yields 2.1% and the price falls to $15/share. With the second share price how would i have negative returns? wont the rising yield price compensate for the lowering of share


Let's say you buy 1 unit for $16. At the end of yr 1, it has dropped to $15. You sell. You get back $15 plus 2% of $16 - 32c. So your $16 returned $15.32. A loss of 68c or -4.25% return
If interest rates rise, the bond fund won't see those, because they already own the lower interest bonds. As a result, bond fund unit price will drop so new buyers can get a yield in line with the market. Existing holders either sell at a loss or just accept the lower yield in hope that eventually they will catch up.


----------



## GreatLaker (Mar 23, 2014)

Juggernaut92 said:


> One thing I dont get is the negative returns of bond funds. If I pay $16/share for a bond fund share and it yields 2.1% and the price falls to $15/share. With the second share price how would i have negative returns? wont the rising yield price compensate for the lowering of share price?


You are correct in thinking that if interest rates go up, then rising rates will increase yields as newer bonds with higher rates are added, but there is a time delay, so bond returns can go negative. It depends on the amount the interest rate changes and the duration of the bond or bond fund. The following link takes you to a spreadsheet with nominal and real returns in C$ for various asset classes. You will see that in nominal terms, short Canadian bonds have had negative returns for 1 of the last 41 years, and all Canadian bonds have had negative returns in 3 of the last 41 years. So yes, bonds can have negative returns, but much less frequently than equities.


https://www.libra-investments.com/Total-returns.xls



Duration is a measure of how long it takes a bond to return the present value of its cash flows. It is also a measure of how volatile a bond's (or bond fund's) price is in reaction to interest rate changes. If a bond has a duration of 5 years, then a percentage point increase in interest rates will cause the bond's price to fall 5%. Short bond funds like XSB and VSB have a duration of about 2.7 years, so if interest rates go up 1 percentage point, their price will drop about 2.7%. Aggregate bond funds like XBB and VAB have a duration of around 8 years, so if interest rated go up 1% their price will drop about 8%. But with the bank rate now at 0.25%, a 1 percentage point rate increase would be a 400% increase, so the likelihood of that is extremely low. (Note that short interest rates and long interest rates are not perfectly correlated, so I have simplified a bit.)

This article: Holding Your Bond Fund for the Duration states "as long as your time horizon is at least as long as the duration of your bond fund, you won’t lose any capital". So if you may need the funds in a couple of years, XBB is not a good choice, and if you may need the funds next year, VSB is not a good choice. Match the duration of your bond holdings to your expected timeline. Horses for courses.

The strange thing is people complain about the risk of bond funds declining in price, but they are willing to hold equities that are much more volatile and have no guarantee that capital will be returned. GIC holders cheer higher interest rates because they know as they buy new GICs, the rates will be higher. But bond fund holders fear higher interest rates because, well... the price might drop, while they ignore impending higher yields.

If you want a specific amount at a certain point in the future, then individual bonds or GICs are a better choice. But if you want a no hassle fixed income investment, bond ETFs are a great choice as long as you don't hold one with a duration that is too long relative to your investment timeline.


----------



## agent99 (Sep 11, 2013)

GreatLaker said:


> The strange thing is people complain about the risk of bond funds declining in price, but they are willing to hold equities that are much more volatile and have no guarantee that capital will be returned. old one with a duration that is too long relative to your investment timeline.


A chart of the TSX or S&P index, will, as you know, show that over time the value grows. While doing that, it pays dividends (currently with about same yield as bonds or better). Bond funds can gain in value in the short term if bought when interest rates are high. If bought when rates are low, there is no upside. At the very best, if held for the duration, you might get your money back plus a little interest. Meanwhile, opportunities for higher returns may have been missed. 

In past, I maintained a ladder of individual bonds and GICs that aimed at yielding about 1-2% in real terms and guaranteed a return of my invested capital. The ladder provided the flexibility to add or re-invest at regular intervals. I once owned bond funds when starting out. Seeing them drop in value is never a good thing for a new investor (which I was back then)

With rates where they are, no fixed income options look good. As a result, according to recent reports, investors have been moving _en masse _to equities. And as a result equities now seem largely overpriced. So we can't win if we are looking to invest today. 


> G&M report: Retail investors drove unprecedented trading volumes on Canada’s stock exchanges in January and February PUBLISHED MARCH 7, 2021


By the way, Malwarebytes won't let me open that link you posted.


----------



## Covariance (Oct 20, 2020)

GreatLaker said:


> You are correct in thinking that if interest rates go up, then rising rates will increase yields as newer bonds with higher rates are added, but there is a time delay, so bond returns can go negative. It depends on the amount the interest rate changes and the duration of the bond or bond fund. The following link takes you to a spreadsheet with nominal and real returns in C$ for various asset classes. You will see that in nominal terms, short Canadian bonds have had negative returns for 1 of the last 41 years, and all Canadian bonds have had negative returns in 3 of the last 41 years. So yes, bonds can have negative returns, but much less frequently than equities.
> 
> 
> https://www.libra-investments.com/Total-returns.xls
> ...


re: Duration and estimating price change
The rate to select for use with the duration calculation should be the one the ETF’s price is most sensitive to. Best estimate is more likely the rate with tenor equal to the ETF’s weighted average term..

[Edited to include reference to weighted average term.].


----------



## GreatLaker (Mar 23, 2014)

agent99 said:


> By the way, Malwarebytes won't let me open that link you posted.


Not sure what would cause that. It is an Excel spreadsheet that works fine on my PC with Malwarebytes. It is maintained on the website of Libra Investment Management, a financial planning company owned by Norbert Schlenker, of the eponymously named Norbert's Gambit.

It is a useful data set if you like looking at returns of various asset classes over time. It's also the basis of Norm Rothery's wonderful Stingy Investor Asset Mixer and Periodic Table of Annual Returns for Canadians.

You could also try to d/l it by going to his site and selecting Links/Research
www.libra-investments.com/


----------



## agent99 (Sep 11, 2013)

GreatLaker said:


> You could also try to d/l it by going to his site and selecting Links/Research
> www.libra-investments.com/


Thanks, I was able to access Norbert's spreadsheet that way.

The numbers are interesting although not so much in the form presented. I like playing with numbers, so looked at cumulative returns assuming those were year over year numbers. Over 50 years TSX certainly underperformed. S&P did about twice as well as long CDN bonds. 

Gold bullion was misleading because gold only came off the gold standard in 1971 and it was artificially priced at $35/oz at the time. 

The numbers don't tell us anything about bond _funds_ vs equities. Maybe that comparison has been done somewhere.


----------



## agent99 (Sep 11, 2013)

Covariance said:


> re: Duration and estimating price change
> The rate to select for use with the duration calculation should be the one the ETF’s price is most sensitive to. Best estimate is more likely the rate with tenor equal to the ETF’s weighted average term..
> 
> [Edited to include reference to weighted average term.].


Sorry, but you lost me there. Bond funds usually QUOTE their duration. Are you talking about how they calculate that duration? I presume it requires detailed knowledge of the funds holdings?


----------



## Juggernaut92 (Aug 9, 2020)

@agent99 : I see. That is a very simple calculation but I did not take that into consideration. Thanks for pointing it out. Yes the investor would have to then wait for the price of the bond fund to go back up or just accept the loss. Would it then be a good ideal to try and get a bond fund when the prices are quite low? I know timing the markets is tricky though...

@GreatLaker : I see. I did check out that spreadsheet and it has lots of interesting information on it. On the spread sheet I see on the real tab that long canadian bonds returned 11.1% in 2020. Which bond would yield this kind of return?

Also, I checked out that article as well. I actually invested $500 into ZAG in december 2020 and another $500 last month. I checked and the weighted average duration is 7.96 years. Does that mean in 7.96 years I can expect to have my regular principal amount of $1000 plus all the distributions over the years at that point? I do have 30+ years to invest till I am retired so my time horizon is pretty far out.


----------



## Covariance (Oct 20, 2020)

agent99 said:


> Sorry, but you lost me there. Bond funds usually QUOTE their duration. Are you talking about how they calculate that duration? I presume it requires detailed knowledge of the funds holdings?


A little clarification - my message was in reply to GreatLakers post about using duration. Specifically using the duration statistic the ETF provider give us to estimate the bond portfolio's price change due to a rate change. But what "rate" are we saying is going to change? As you point out we don't have complete knowledge of the portfolio. But they do give us the weighted average term to maturity of the ETF's portfolio. So we can at least use the bond at that point on the curve as a reference. Then we can estimate how that bond's rate might change under the conditions we are are concerned about seeing in the future.

To illustrate - here are a few rate changes at different parts of the curve over the past year; Bank of Canada policy rate has not changed, but the Canada 5year has gone from 0.43% to 0.94% and the 10year; 0.61 to 1.5%.


----------



## agent99 (Sep 11, 2013)

Covariance said:


> A little clarification - my message was in reply to GreatLakers post about using duration. Specifically using the duration statistic the ETF provider give us to estimate the bond portfolio's price change due to a rate change. But what "rate" are we saying is going to change? As you point out we don't have complete knowledge of the portfolio. But they do give us the weighted average term to maturity of the ETF's portfolio. *So we can at least use the bond at that point on the curve as a reference. *Then we can estimate how that bond's rate might change under the conditions we are are concerned about seeing in the future.
> 
> To illustrate - here are a few rate changes at different parts of the curve over the past year; Bank of Canada policy rate has not changed, *but the Canada 5year has gone from 0.43% to 0.94% and the 10year; 0.61 to 1.5%.*


So, should we be using the GOC 5 or 10 rate as the reference or try and find the yield of a bond that the ETF holds with that maturity? Then take a guess on how much that rate might change to determine the effect on the fund's price

As you can tell, I am not into bond _funds_  I did own a couple a long time ago.. Most of my FI is (or was) in individual corporates and GICs.


----------



## GreatLaker (Mar 23, 2014)

Covariance said:


> A little clarification - my message was in reply to GreatLakers post about using duration. Specifically using the duration statistic the ETF provider give us to estimate the bond portfolio's price change due to a rate change. But what "rate" are we saying is going to change? As you point out we don't have complete knowledge of the portfolio. But they do give us the weighted average term to maturity of the ETF's portfolio. So we can at least use the bond at that point on the curve as a reference. Then we can estimate how that bond's rate might change under the conditions we are are concerned about seeing in the future.
> 
> To illustrate - here are a few rate changes at different parts of the curve over the past year; Bank of Canada policy rate has not changed, but the Canada 5year has gone from 0.43% to 0.94% and the 10year; 0.61 to 1.5%.


Well said. To add one more thing, the Bank of Canada rate is intended to influence very short term rates (aka the overnight rate). Longer term rates may take some directionality from the BoC rate, but they are really driven by the market, and sometimes even move in different directions than the bank rate. You can't set expectations for bond prices, and bond fund prices, by changes in the bank rate.


----------



## GreatLaker (Mar 23, 2014)

Juggernaut92 said:


> @GreatLaker : I see. I did check out that spreadsheet and it has lots of interesting information on it. On the spread sheet I see on the real tab that long canadian bonds returned 11.1% in 2020. Which bond would yield this kind of return?


Long term bond funds like XLB, VLB and ZFL. If you look at the returns for long bonds they are higher but more volatile than medium and short term bonds. XLB has an average term of 22.7 years and an average duration of 15.5 years. If long-term interest rates spike up, its price could drop a lot.



> Also, I checked out that article as well. I actually invested $500 into ZAG in december 2020 and another $500 last month. I checked and the weighted average duration is 7.96 years. Does that mean in 7.96 years I can expect to have my regular principal amount of $1000 plus all the distributions over the years at that point? I do have 30+ years to invest till I am retired so my time horizon is pretty far out.


At a minimum, after 7.96 years, what you could sell your ZAG for plus the distributions received since you purchased it should be equal to what you paid for it. You should not lose money selling if you hold it at least that long.

With 30+ years to retirement I would have 100% equity. If you don't want that, consider somewhere between 0% and 20% bonds, then 10 or 15 years prior to retirement consider gradually increasing your bond % to something you are comfortable retiring with.


----------



## Juggernaut92 (Aug 9, 2020)

GreatLaker said:


> Long term bond funds like XLB, VLB and ZFL. If you look at the returns for long bonds they are higher but more volatile than medium and short term bonds. XLB has an average term of 22.7 years and an average duration of 15.5 years. If long-term interest rates spike up, its price could drop a lot.


For this you are talking about the returns being high when the distribution is reinvested over a 20 or 15 year period? I ask because i checked the distribution for XLB and it is at 3.26% on yahoo finance which is different than the 11% on your spreadsheet.



GreatLaker said:


> At a minimum, after 7.96 years, what you could sell your ZAG for plus the distributions received since you purchased it should be equal to what you paid for it. You should not lose money selling if you hold it at least that long.


Ahh I see. Thanks for breaking this down for me. 



GreatLaker said:


> With 30+ years to retirement I would have 100% equity. If you don't want that, consider somewhere between 0% and 20% bonds, then 10 or 15 years prior to retirement consider gradually increasing your bond % to something you are comfortable retiring with.


Interesting. Yes the thing is that I read a lot of books where they mentioned having bonds in your portfolios etc and that is why I have it. I also keep hearing that yields are going down and having bonds in your portfolio is not as relevant today etc. Because of all this noise I decided to have just 10% of my portfolio to be in bonds. With what you are saying I may just keep my position as is let bond funds become only 5% of my portfolio.


----------



## GreatLaker (Mar 23, 2014)

Juggernaut92 said:


> For this you are talking about the returns being high when the distribution is reinvested over a 20 or 15 year period? I ask because i checked the distribution for XLB and it is at 3.26% on yahoo finance which is different than the 11% on your spreadsheet.
> 
> 
> Ahh I see. Thanks for breaking this down for me.
> ...


Bonds are complicated. XLB had a return of 11.54% in 2020, compared to its benchmark of 11.9%. That discrepancy, known as tracking error, is a result of the fund's MER and other inefficiencies of running the fund such as trading costs and cash drag. 

Of XLB's 2020 return, 3.26% of it came from monthly distributions, which consist of interest and capital gains. The rest came from price increase, which was driven by dropping rates in 2020 due to the pandemic. To get that rate going forward, interest rates will have to continue to drop, which seems unlikely.

You don't know what XLB will return in the future, but if interest rates stay the same, a reasonable estimate of future return is the Yield to Maturity (YTM) - its MER, so 2.71% - 0.2%. But that is only if interest rates stay the same as they are now. Did I mention that bonds are complicated?


----------



## james4beach (Nov 15, 2012)

Juggernaut92 said:


> Yes the thing is that I read a lot of books where they mentioned having bonds in your portfolios etc and that is why I have it.


This is a good idea. The books are based on long-term studies and take a long term view on creating good portfolios.



Juggernaut92 said:


> *I also keep hearing that* yields are going down and having bonds in your portfolio is not as relevant today etc. Because of all this noise I decided to have just 10% of my portfolio to be in bonds. With what you are saying I may just keep my position as is let bond funds become only 5% of my portfolio.


These people in the media really have no idea what's going to happen with bonds. They are about as accurate as people who go on TV and say "stocks will fall this year" ... they're really _guessing._

I recommend developing your investment strategy based on the longer term views, and tune out anyone who pretends to know what's going to happen in the immediate future.

I'm 50% bonds (and GICs) because they provide stability and safety for my portfolio. I also have trouble understanding how anyone who is retired can tolerate having less than 30% bonds. If you are 70% equities and the stock market crashes, you're looking at a 40% decline in your invested wealth. I don't know about the rest of you but I really don't want to see my net worth taking a 40% hit when I am no longer employed.


----------



## GreatLaker (Mar 23, 2014)

agent99 said:


> The numbers are interesting although not so much in the form presented. I like playing with numbers, so looked at cumulative returns assuming those were year over year numbers. Over 50 years TSX certainly underperformed. S&P did about twice as well as long CDN bonds.


You can use the Stingy Investor Asset Mixer to get returns for any of the asset classes or combination of asset classes. It uses the data from the Libra spreadsheet. Interestingly, comparing TSX, S&P500, EAFE and long bonds over 50 years from 1971 to 2020, The S&P500 gave the best return by a good margin. But for the 40 years from 1971 to 2010, the results for those 4 asset classes are much closer, with EAFE giving the highest return. Some might say that's data mining (and it is), but it shows the strength of the S&P500 over the last decade.




> The numbers don't tell us anything about bond _funds_ vs equities. Maybe that comparison has been done somewhere.


You can compare XBB (aggregate Canadian bonds) to its benchmark (FTSE Canada Universe Bond Index) at this link: iShares Core Canadian Universe Bond Index ETF | XBB (blackrock.com). Click on Performance then Calendar Year. You can even see how the fund's tracking error dropped significantly as the fund's MER dropped from 0.33% in 2016 to 0.10% in 2020. 

You could compare bond funds to equities by using the asset mixer to get past returns for bonds vs. the various asset classes. If you set the Alpha column = *-*(MER + TER) it should give a good estimate of past returns for funds. Or just look at the fund web pages. (And for most index ETFs, the TER will be immaterial.) If comparing bond funds to bonds, remember to adjust bond returns for the broker's spread on bond purchases, and cash drag if bond interest payments are not reinvested.


----------



## Juggernaut92 (Aug 9, 2020)

GreatLaker said:


> Of XLB's 2020 return, 3.26% of it came from monthly distributions, which consist of interest and capital gains. The rest came from price increase, which was driven by dropping rates in 2020 due to the pandemic. To get that rate going forward, interest rates will have to continue to drop, which seems unlikely.
> 
> You don't know what XLB will return in the future, but if interest rates stay the same, a reasonable estimate of future return is the Yield to Maturity (YTM) - its MER, so 2.71% - 0.2%. But that is only if interest rates stay the same as they are now. Did I mention that bonds are complicated?


Thanks for the break down. Yes you did mention bonds are complicated. That is why I felt iffy about putting them in my portfolio in the first place. I think I will just hold some that I am comfortable with and when I am close to retirement I can think about a bigger allocation.



james4beach said:


> If you are 70% equities and the stock market crashes, you're looking at a 40% decline in your invested wealth. I don't know about the rest of you but I really don't want to see my net worth taking a 40% hit when I am no longer employed.


This is a very good point. I will keep this in mind. Luckily I am many years away from retirement. I just started investing last year but I am hearing that this has been the quickest market recovery of all time. In the past it took the market 5ish years to recover to regular prices. Maybe with all this optimism people are not thinking of the value of bonds.


----------



## ian (Jun 18, 2016)

Just got our report from PHN for their Absolute Bond Fund. This is the bulk of the fixed component of our investment portfolio:

"The Fund rebounded nicely during Q1-2021, and posted a return of +9 to +11% over the 3 month period ended March 31, 2021 (see page 9 for full details). After this recovery, the fund has regained its admirable performance track record: now showing 7.5% per year over 5 years, and 8.3% per year over 10 years (series O)."


----------



## GreatLaker (Mar 23, 2014)

Juggernaut92 said:


> Thanks for the break down. Yes you did mention bonds are complicated. That is why I felt iffy about putting them in my portfolio in the first place. I think I will just hold some that I am comfortable with and when I am close to retirement I can think about a bigger allocation.


To clarify, I was not suggesting you always avoid bonds. They give less volatile returns and more stable income than equities. They have a place for risk averse investors, and for retirees that need to withdraw capital from their portfolio.


----------



## My Own Advisor (Sep 24, 2012)

"I was curious to know how many people, who are retired or close to being retired, hold bonds in their portfolio."

We plan to own $0 bonds in semi-retirement, within another 3-5 years. I prefer a cash wedge. Have ~1-years' worth of cash savings, then work part-time, then "live off dividends and distributions" in the early years of semi-retirement. 

I go back to this article from Ben Carlson, who wondered why anyone would own bonds right now. 
Ben cites a few reasons in his post but my favourite is in bold below with my reasoning:

Bonds can help your investing behaviour – riding out stock market volatility.
Bonds can be used to rebalance your portfolio; keep your portfolio aligned to your investing risk tolerance, and help you adjust it back to its target asset allocation (i.e., keeping a balanced mix of stocks and bonds).
*Bonds can be used for spending purposes – where some fixed income is “king” for major, upcoming expenses or spending.*
Finally, bonds can help protect against deflation – since inflation is a killer for bonds long-term.
You can do the same thing with bonds today, as with cash in modest interest savings account, with far more liquidity (i.e. get the cash when you need it.)

Just my thoughts and plan!


----------



## james4beach (Nov 15, 2012)

ian said:


> "The Fund rebounded nicely during Q1-2021, and posted a return of +9 to +11% over the 3 month period ended March 31, 2021 (see page 9 for full details). After this recovery, the fund has regained its admirable performance track record: now showing 7.5% per year over 5 years, and 8.3% per year over 10 years (series O)."


I think you mean PH&N Absolute Return Fund

This appears to be a hedge fund, and they don't disclose their portfolio or financial statements publicly. The magnitude of the returns, and chart I see at G&M strongly suggest that this is not a bond fund. Notice for example the 2020 crash drawdown in this hedge fund was -31% which is more than *double the volatility* of a standard bond fund, and much more like equity volatility.

Their 2020 calendar year return was -16% while typical bond funds made +8.6% so I really have no idea what they are doing 'under the hood'.

@ian this does not behave like fixed income so I'm not sure why you are calling it that.


----------

