# Is there any point to holding bonds right now if the retirement window is in 25-30 years?



## NewbieInvestor88 (Feb 21, 2021)

I know bonds offer safety and of course we can't predict the future. But if the historical data shows that the stock market always goes up and the equity premium has never been negative over a 25-30 year period, then what's the point of holding bonds? 

Basically why hold VGRO ETF (80/20) when you can hold VEQT (100/0) long enough?


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## james4beach (Nov 15, 2012)

NewbieInvestor88 said:


> But if the historical data shows that the stock market always goes up


The data on this is a bit sketchy, actually. There really is only solid world market pricing data since I think the 1950s or 1970s, so all we really know is that an indexing approach (worldwide) has worked well for the last 70 years or so. The US does have longer term data, and it's the *only* country with longer term stock data. But this is just one country. It's a bit of a leap to assume that globally, stocks will act like they did in the US over the last 200 years.

The history of stock returns is not actually as solid as it seems at first glance. And that is the first reason to diversify into other assets. Yes, the mainstream thinking is that world equities _should_ beat bonds for the foreseeable future, but this is not a law of nature and it's not guaranteed.

The equity premium also comes from the social sciences, the current thinking in economics. This kind of thinking can change with time. Because it's not a law of nature, it's possible that something could happen in the world economy (social, cultural, technological) which changes the equity premium. The stock market could change, and turn into something very different than the stock market of the Baby Boomers -- which we can all agree has performed great.

The second issue is that even in global history, stocks have sometimes gone long periods of underperforming bonds on a risk-adjusted basis. It's possible that stocks could do badly for a 20 or 30 year stretch.

What if you need to access any of your money 20 years from now? How about 10 years from now? A diversified portfolio (containing bonds) is the only way you can get more assurance that your portfolio will actually be up in 10 years.

If you invest in VEQT, there is a chance you will be down 10 or 20 years from now.

The third reason is behavioural. Many people can't handle the volatility of stocks, and then are unable to stick with their investment plans through bear markets. A bond component like in VGRO or VBAL smooths the experience and makes it easier for most people to stick with the plan.



NewbieInvestor88 said:


> Basically why hold VGRO ETF (80/20) when you can hold VEQT (100/0) long enough?


Mainly because you might not be able to hold VEQT long enough (30+ years). Even five years is an eternity, to most investors.


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## londoncalling (Sep 17, 2011)

@james4beach does a great job in highlighting the reasons why one should consider diversification between asset classes. I would agree with the OP that probability favours equities. IMO behaviour plays the largest role in risk tolerance. Like many situations we play the odds. a hypothetical 90% chance is often one I would take. However, with investing for retirement you only get one shot. I think the greatest factor in this decision is comfort level. If you can conquer the emotional part of the decision it gets easier. However, until one is actually in that situation they don't know for certain what they will do. A good exercise is to run some simulations to see what the difference is between a 100% and and an 80%/20% over 30 years. That should help you decide if the extra risk is worth it for you. Again, no one knows what will happen in the next 30 years but it is likely equities will outperform bonds. However are you able to adjust your plans if it doesn't? I don't mean change your allocation but more so can you delay retirement?


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## :) lonewolf (Feb 9, 2020)

I would have to double check the charts though if memory is correct there was a time when the DJT index was lower something like 70 years latter after putting in an historic high, gold lower 100 years latter after a historic high, The most recent example is The Niki which is lower then 1989.

The bond market is in the biggest bubble ever i.e., negative interest rates for a lot of bonds.


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## agent99 (Sep 11, 2013)

I think of bonds, GICs and equities all as possible securities to invest in. If bonds (or GICs) are not offering a positive Real total return ( actual yield minus inflation) I wouldn't buy them until they are doing a bit more than breaking even. No point in purposely losing money. Right now, inflation rates are unstable, but most FI seems to be a losing proposition. 

With a 25-30 year horizon, fixed income will no doubt be more attractive again in time. Then, instead of an Eq/FI balanced ETF, you might rather hold an equity ETF with allocation across Can/US/Int and add a 5 year GIC ladder. Maybe also buy some individual corporate bonds. Later maybe add individual TSX stocks like the banks, utilities and telecoms and avoid ETF MERs. Even that 1/2% makes a difference in the long term.

For a start in Growth ETFs, this Morningside report seems to provide a good summary:









Canada’s Best All-in-One ETFs


Whether you want income, balance or growth, these top one-ticket solutions deliver convenience and performance at a fraction of the cost of mutual funds




www.morningstar.ca


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## NewbieInvestor88 (Feb 21, 2021)

:) lonewolf said:


> I would have to double check the charts though if memory is correct there was a time when the DJT index was lower something like 70 years latter after putting in an historic high, gold lower 100 years latter after a historic high, The most recent example is The Niki which is lower then 1989.
> 
> *The bond market is in the biggest bubble ever i.e., negative interest rates for a lot of bonds.*


Surely the law of averages will eventually happen, right?


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## james4beach (Nov 15, 2012)

NewbieInvestor88 said:


> Surely the law of averages will eventually happen, right?


I just want to point out that Canadian bonds don't have negative yields. In fact, our bond market is looking like one of the healthiest in the world... we actually have reasonable yields (versus the world) plus a "yield curve" which is more normal.


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## :) lonewolf (Feb 9, 2020)

NewbieInvestor88 said:


> Surely the law of averages will eventually happen, right?


 Since 1922 the value of the DJI in terms of commodities (CRB) has risen 200 times. If the ratio was to fall back to the 1960s - 1970s level it would require a decline of 95% - 98%. If you want to play the law of averages will bring the ratios back to normal short stocks buy commodities


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## agent99 (Sep 11, 2013)

NewbieInvestor88 said:


> Surely the law of averages will eventually happen, right?


Averages of what? Do you mean the ups and downs of the markets would average out? Not sure that would be a good thing!


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## Jimmy (May 19, 2017)

Gordon Pape's (Globe and Mail Advisor) advice on inflation in article today given the rising interest rate environment. Only ST bonds. Don't even go w a 5 yr GIC.

*Stay short-term with bonds*

Interest rates are going to rise, it’s just a matter of time. Bonds with longer terms to maturity face disproportionate risks. The FTSE Canada Short-Term Bond Index was down only 0.54 per cent year-to-date as of June 18. The Long-Term Index was off 7.08 per cent. Or consider convertible bonds. They’re up 6.2 per cent year-to-date.

*Don’t lock in long-term GICs*

Rates for guaranteed investment certificates are still low and running below the current pace of inflation. The best five-year return showing on ratehub.com right now is 2.2 per cent. If inflation continues at a higher rate, you’ll lose purchasing power every year plus you’ll be liable for tax on the interest if the GIC is not in a registered plan. Wait for rates to rise before locking in.


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## Thal81 (Sep 5, 2017)

I think market timing bonds is pointless. People were having the same conversations in 2017-18, look how that turned out. I'm ok if prices continue to trickle down, after all the gains we had in the last 2 years, it's totally expected. Also, all the new bonds that will be bought with higher coupon rates will make up for it in the long term. 
Aggregate bond funds forever <3


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## james4beach (Nov 15, 2012)

Jimmy said:


> Gordon Pape's (Globe and Mail Advisor) advice on inflation in article today given the rising interest rate environment. Only ST bonds. Don't even go w a 5 yr GIC.


He doesn't know what he's talking about. You shouldn't get investment advice from bad sources like this.

For example a 5 year GIC ladder would perform great even if interest rates continue to rise. Anyone (like Gordon) saying to wait and time GIC rates really has no clue what they're doing.


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## Jimmy (May 19, 2017)

james4beach said:


> He doesn't know what he's talking about. You shouldn't get investment advice from bad sources like this.
> 
> For example a 5 year GIC ladder would perform great even if interest rates continue to rise. Anyone (like Gordon) saying to wait and time GIC rates really has no clue what they're doing.


You should take his advice gratefully. He is a writer for the Globe who also has written 6 books on finance and is an editor of numerous finance web sites. Locking in an investment w a .5% real return for 5 yrs is not a great investment. He wants to make $ and is right. You are wrong.


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## agent99 (Sep 11, 2013)

Thal81 said:


> I think market timing bonds is pointless.


Buying bonds or gics that are guaranteed to lose you money is pointless. Just like any investment.


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## diharv (Apr 19, 2011)

I always start out with good intentions of holding bonds or bond ETF in a new account. Invariably I sell them at a loss and replace with bank stocks. I don't understand them, fail to see the point in them and agree with the OP first post.


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## james4beach (Nov 15, 2012)

agent99 said:


> Buying bonds or gics that are guaranteed to lose you money is pointless. Just like any investment.


They are not guaranteed to lose money. Whether or not they make money depends on the inflation rate over the following years. It cannot be predicted. I do agree it's unlikely that fixed income will have a positive real return over the next 5-10 years, but that's just a guess. We're talking probability.

It's also possible that GICs will have a positive real return over the next 10 years. _Nobody knows, because the inflation rate can't be predicted_. But to have your best chances at a good result, you need to stay continuously invested.

Also, fixed income portfolios (like GIC ladders or bond funds) are meant to be long term investments. They are a passive approach to remaining invested in fixed income over a large number of years. We cannot predict what inflation will be in the following years, or a decade or two from now.

What we do know is that bonds/GICs have provided good risk adjusted returns, and positive real returns, over the long term. So the passive approaches (like a GIC ladder) are about being continuously invested in the long term. Even when they provide zero real return, they still provide attractive risk-adjusted returns. In a portfolio, they reduce the risk and volatility of the portfolio thanks to diversification.

Even in Japan, with persistent zero rates, fixed income still produced a good risk-adjusted return, and still helped stabilize portfolios.

Anyway, I'm wasting too much time on this, but Gordon Pape doesn't know what he's talking about, and mistakenly thinks he can time the bond market. Jimmy, you are getting bad advice from these personalities. *Gordon Pape also has other terrible advice* -- he advises picking individual stocks, target "winners" to beat the market... totally flawed advice. Then he writes about his pandemic stock picks.

All of it is bad advice, but actually reflects how a lot of investors think. These are the reasons why most investors will ultimately do worse than a simple, index-based "balanced fund", and Gordon Pape helps ensure that underperformance.


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## MrBlackhill (Jun 10, 2020)

Buffet also says to avoid bonds. I guess he's also giving a terrible advice and doesn't know what he's talking about.

It's just your confirmation bias @james4beach

Those avoiding bonds have confirmation bias looking at articles favorable to their opinion.

Those still investing in bonds have confirmation bias looking at articles favorable to their opinion.

We all have our reasons.

Personally, I'm not looking to reduce my portfolio volatility, I'm looking to increase my returns, so I'm avoiding bonds.

About your thread title question :









And, to put those statistics in context :









My conclusion : if, as of today, the money you invest will stay untouched for the next 20+ years, then invest in stocks.


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## pwm (Jan 19, 2012)

I agree with the OP. Stay away from bonds. They will yield less than inflation going forward. I've been retired 16 years and hold no bonds.


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## agent99 (Sep 11, 2013)

I am not totally avoiding bonds, but pickings are slim and risk higher if looking for 1% over target inflation rate of 2%. 
I did buy a small amount of a Morguard bond the other day, and it falls into that more risky category. Yields about 3.6%, matures in 3.4 yrs.

If I exclude preferreds, we at present have about 19% in corporate bonds and GICs. 
Not buying bonds/gics unless they have positive RR and I have small amounts of spare cash that I am prepared to risk. Never buying High Yield bonds (BMOIL make it harder to buy HY bonds, which is a good deterrent  )

BMOIL puts preferreds in our Fixed Income allocation. There, we have another 14%. Mostly bought during fire sale last Spring and showing healthy capital gains as well as yielding in 5-6% range on our cost. Mix of perpetuals, min rate resets and resets. Not planning on selling, but some min resets may get called depending on how soon rates start to rise.

33% total FI is below my target of 40% (I am over 80!). But at least all FI securities have a positive Real Return. The drop below target was mainly caused by the current run up in equities. This could self-correct, as it has often done in the past


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## Numbersman61 (Jan 26, 2015)

I avoid bonds. Even though some disagree, I consider rate reset preferreds asfixed income for my purposes.


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## pwm (Jan 19, 2012)

I hold ~ 10% of my investments in perpetual prefs which I add to when they go on sale like they did last March. I consider these to be the fixed income component of my investment portfolio. No bonds or bond funds. BTW, Gordon Pape is correct.


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## james4beach (Nov 15, 2012)

Long story short: make your asset allocation decision, and then stick with it. @Jimmy and @MrBlackhill decided long ago that they don't need bonds. Fine, but you've already made your decision so I don't know why you even care what anyone says on the topic.



MrBlackhill said:


> Buffet also says to avoid bonds. I guess he's also giving a terrible advice and doesn't know what he's talking about.


That's incorrect. Buffett *does* actually have a significant amount of bonds in the Berkshire portfolio, so perhaps you don't understand how he invests. They have pretty massive amounts of t-bills and bonds. And even for his personal estate, he's decided to have 10% allocated to short-term bonds... he's leaving his wife with billions of $ of bonds.

I don't have any problem with people who decide they don't need any bonds. It's up to each person to choose how to allocate their portfolio. For example Buffett decided that his allocations will include bonds.

My gripe is with people who start off with bonds in their portfolio, like 60/40 or as GIC investors maybe, and then -- based on market conditions -- decide to abandon bonds. That kind of thing, which Gordon Pape endorses, is a mistake. Making tactical changes and timing the market generally harms investors. Generally speaking Pape is pretty clueless about investing, because he also encourages people to pick individual stocks to, for example, ride out the pandemic. Stupid advice.

So if you're like @pwm and don't need any bonds in your asset allocation, that's fine, and there is nothing to wonder about. You decide you don't want them, and stay away from them. Same with @Jimmy and @MrBlackhill , none of you guys should care at all what anyone says about bonds, because you already decided you are not going to hold any fixed income.

However if you DO already invest in fixed income, bonds, GICs, then you really have to stick with it no matter what interest rates are. Otherwise you are engaging in market timing and you're going to get burned by diverging from your investment plan. And characters like Gordon Pape encourage those bad behaviours which harm investors.


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## james4beach (Nov 15, 2012)

agent99 said:


> 33% total FI is below my target of 40% (I am over 80!). But at least all FI securities have a positive Real Return. The drop below target was mainly caused by the current run up in equities. This could self-correct, as it has often done in the past


That's pretty far below your target. In your annual rebalancing, it sounds like you'll need to sell some equity and buy more bonds/GICs. If that's what your asset allocation plan is, that's what you'll have to do (and for good reason).


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> I don't know why you even care what anyone says on the topic.


Well, because the topic is about answering the question whether there's a point in holding bonds for 25-30 years, so I give my opinion as other did.

In fact, I didn't even give my own advice, I just provided some statistics and my personal choice. And then I said we all have our own reason to hold or to avoid bonds.

And I always said (though not in this thread yet) that bonds are good to decrease the portfolio volatility. So if you can't handle the volatility or if there's a chance you need that money in 5-10 years instead of holding it for 25-30 years, then adjust your asset allocation according to your own risk tolerance and investor profile.



james4beach said:


> My gripe is with people who start off with bonds in their portfolio, like 60/40 or as GIC investors maybe, and then -- based on market conditions -- decide to abandon bonds.


Sticking to a plan is good, and adapting to context is also good. That's also a choice. That depends on what is the plan/strategy and it depends on your personality.


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## Covariance (Oct 20, 2020)

NewbieInvestor88 said:


> I know bonds offer safety and of course we can't predict the future. But if the historical data shows that the stock market always goes up and the equity premium has never been negative over a 25-30 year period, then what's the point of holding bonds?
> 
> Basically why hold VGRO ETF (80/20) when you can hold VEQT (100/0) long enough?


It has been shown that over long periods the return to equities is linked to the growth of the economy. There is also dividends, and any effect of P/E expansion.

Most situations are not a single, one-time investment left untouched for 25 years however. More typically people are adding to their investment through savings on a regular basis, along with lump sum contributions to the portfolio every so often. They also need liquidity for various lifestyle or family needs. In these circumstances the diversification and regular income benefits of fixed income help to reduce the impact of the timing of new investments/withdrawals on the total realized return at the end date, and of course the liquidity.


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## MrBlackhill (Jun 10, 2020)

So you _*may*_ want to adjust your asset allocation as you get near retirement. The money you put now and that you will most likely don't need for 25+ years could be in stocks. But 10 years from now, you may want to add a volatility/drawdown protection.


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## MrBlackhill (Jun 10, 2020)

My previous post was the financial advice and I agree with it.

Now, just to add confusion, I have my own personal strategy and point of view. And this is not a financial advice, it's just sharing how I manage my money, which is adapted to my own situation.

If at 25 years old I invest $10,000 all in stocks, growing at 10% CAGR over 30 years and with an inflation of 3% CAGR leading to 6.8% CAGR real return in present value. So that $10,000 will be worth $72,000 in present value. Which means at 55 years old, I should be able to spend up to $72,000 from what I invested when I was 25. And if I do this again at 26, it'll cover my 56 of age. And at 27, it'll cover my 57, and so on (adjusting for inflation my annual investment). So in the end, I always invest 100% in stocks with the goal that I should use that money only 30 years from now, knowing that stocks is the best-performing asset class.

That's my personal strategy for my retirement money. I have different strategies when it comes to other contexts. It's just another way to see it. I actually have a target wealth before retirement.


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## Jimmy (May 19, 2017)

james4beach said:


> Long story short: make your asset allocation decision, and then stick with it. @Jimmy and @MrBlackhill decided long ago that they don't need bonds. Fine, but you've already made your decision so I don't know why you even care what anyone says on the topic.
> 
> Generally speaking Pape is pretty clueless about investing, because he also encourages people to pick individual stocks to, for example, ride out the pandemic. Stupid advice.
> And characters like Gordon Pape encourage those bad behaviours which harm investors.


Because there is a lot of good advice already out there on adapting bond holdings to changing markets that OP might find useful. I don't know why you seem to feel you have to discredit sensible opinions from financial experts just because they differ from your theoretical views.

Pape recommends mainly index ETF holdings w some stocks btw the same index model you follow. Is his advice good now because it agrees w your academic views on investing?


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## :) lonewolf (Feb 9, 2020)

Numbersman61 said:


> I avoid bonds. Even though some disagree, I consider rate reset preferreds asfixed income for my purposes.


 With all the lies government has been telling us who in their right mind invest in government bonds. Government destroys the money world & is more dangerous then any virus.


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## AltaRed (Jun 8, 2009)

Gordon Pape is just another writer focusing on financial matters like dozens of others in the field. Like others, he is worthy of hearing what he has to say but one must just take it as more data/information. He would now be obscenely rich and not "writing for his supper" if he was any better than the rest.

There is no point in holding bonds (ballast) in one's portfolio IF one is 20-30 years away from retirement and IF one has other debt such as a non-deductible mortgage. Provided however that one can accept the volatility of the extremes of the equity markets and not panic if/when equity markets dive 35%. It is easier to take it if it is 35% on $100k but harder to take if it is $350k on $1M, or $1M on $3M.....even though percentage wise, there is no material difference.


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## pwm (Jan 19, 2012)

Good point AltaRed. Example from just one of my accounts on March 2020:


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## agent99 (Sep 11, 2013)

AltaRed said:


> It is easier to take it if it is 35% on $100k but harder to take if it is $350k on $1M, or $1M on $3M.....even though percentage wise, there is no material difference.


I don't know - Maybe you have that backwards? 

If you are younger and "only" have $100k invested, when you lose $35k, that could be a very significant event. Could be a significant part of your net worth.

If you have made your bundle and have $3Million invested, after the portfolio retracts to $2Million you are still very well off! You can wait until the markets come back, as they always do. Even easier to do if those investments continue to pay dividends during the pullback


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## pwm (Jan 19, 2012)

Here's the long term trend from 2010 of my "all stock investments" : (XIRR is 7%).


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## james4beach (Nov 15, 2012)

agent99 said:


> If you have made your bundle and have $3Million invested, after the portfolio retracts to $2Million you are still very well off! You can wait until the markets come back, as they always do.


And what if you're in retirement, and it takes the markets 15 years to come back? Wouldn't you say that can get a bit stressful?

You might have retired with $3 million and everything was looking great for retirement (you have enough money). Then it shrinks to $2 million, and now your retirement looks more tenuous. One year goes by and you're still at $2 million and wondering when the market will bounce back. Five years goes by. TEN years goes by and you're still around $2 million, still down $1 million that you were counting on.

*Now your retirement isn't looking so safe. *Oops, maybe you don't have enough to retire.

Surely everyone here remembers 2000-2013 because that's exactly what people were worried about. It caused a lot of stress for people.

Looking at the long term chart from @pwm above, he could have seen that 2020 crash keep the line at that depressed level, potentially for many years. Markets don't always bounce right back up like they did in this case.

It's easy to love stocks (as everyone does right now) when they are at all time highs and have been strong for years.


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## agent99 (Sep 11, 2013)

pwm said:


> Here's the long term trend from 2010 of my "all stock investments" : (XIRR is 7%).


No withdrawals during that period? Dividends re-invested?

Regarding James' post - He worries too much. Some of us have been around long enough to have been through several ups and downs of the markets. He has not.

We only had one significant pull back. Our year end balance in 2008 had retracted to what we had when I retired and started DIY investing in 2003. That soon bounced back. We have drawn about 3.5-4% annually. Our current portfolio balance is now double what we started with in October 2003. I never worry about the total portfolio value. The cash flow is more important. It has never been affected by ups and downs of the markets. Our withdrawal rate has grown at least in concert with inflation. We could draw more.

I should mention that our portfolio does include corporate bonds and GICs. I don't buy them unless they offer a positive real return. Without them our portfolio value would have been a little more volatile but would also no doubt now be quite a lot higher.


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> It's easy to love stocks (as everyone does right now) when they are at all time highs and have been strong for years.


When held for at least 20 years, stocks have beaten bonds at least 9 times out of 10 in the past 100 years, so I'll take my chances.

I don't know if we should call 100 years a "recency bias".

If yes, then for the past 160 years, stocks have beaten bonds at least 8 times out of 10 when held 20 years.

We have to go back to the early 1800s for bonds to almost systematically beat stocks when held 20 years. But something tells me I wouldn't compare 1800s to 2000s...


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## pwm (Jan 19, 2012)

I n_ever worry about the total portfolio value. The cash flow is more important. It has never been affected by ups and downs of the markets. _ 

Exactly right agent99. The dividends from my investments have remained the same over several corrections and I've been re-investing them. 

Question for J4B: Why should I care what price other people are trading my stocks at when the dividends remain the same?


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## AltaRed (Jun 8, 2009)

agent99 said:


> I don't know - Maybe you have that backwards?
> 
> If you are younger and "only" have $100k invested, when you lose $35k, that could be a very significant event. Could be a significant part of your net worth.
> 
> If you have made your bundle and have $3Million invested, after the portfolio retracts to $2Million you are still very well off! You can wait until the markets come back, as they always do. Even easier to do if those investments continue to pay dividends during the pullback


My post was written with the context of the Subject Title in mind. Young folk with 20-30 years to retirement are more likely to have a $100k portfolio than a $3M portfolio. Lots of time to recover with career earnings and thus equities are the game (subject to volatility tolerance).

That said, my additional point was that a $35k paper loss on $100k (for a young person) should be no more or less traumatic than a $1M paper loss on $3M (for a retiree) and yet I have regular debates with folks about this. Somehow people obsess over absolute numbers rather than than ratios and percentages, which is a complete loss of sight of the forest for the trees. I do not obsess with roller coaster changes in my absolute numbers. I notice them, of course, but it does not change my behaviour or my ability to sleep at night. It is important to keep things in perspective.

Added: I also don't obsess over my investment income stream. It is what it is. I am guessing my portfolio yield is currently about 2.5% or maybe closer to 3%, given the incredible asset inflation (capital appreciation) that has occurred this past year. I only look at my investment income stream a few times... once in January via Quicken, and then again in April off my T1 General for the previous year. It is just another component of my Total Return.


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## agent99 (Sep 11, 2013)

AltaRed said:


> That said, my additional point was that a $35k paper loss on $100k (for a young person) should be no more or less traumatic than a $1M paper loss on $3M (for a retiree) and yet I have regular debates with folks about this. Somehow people obsess over absolute numbers rather than than ratios and percentages, which is a complete loss of sight of the forest for the trees.


Ratios and percentages can be very misleading. How many times do people boast about making 20% on their investments, but fail to mention that their total portfolio is only say $10k? Real numbers tell the actual story.

When a relatively young family loses $35k (on paper) of their hard earned $100k in savings, and they don't have experience or some other way of foreseeing the future, it could be quite disconcerting. As mentioned above, at one time (on paper) we lost 50% of our portfolio value (even more on the equity allocation). Neither of us were at all concerned because the income still flowed in. No need to sell equity at a loss to provide income. 

2.5% portfolio yield does seem low? Last time I looked we were at something over 4%. Of course, percentages are again misleading. In real $$, you probably have a lot more income than I do


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## AltaRed (Jun 8, 2009)

I will continue to disagree with you on ratios. For someone starting out, a $2k annual gain on a $10k portfolio is a big deal. It is every bit as significant to that person as is a $20k annual gain on a $100k portfolio for someone who has been investng for 10 years and has accumulated more assets. That 20% is just as meaningful for that person at that time. It is kind of offensive to suggest it is not as important

As to my portfolio yield, the percentage will vary depending on whether markets are up or down. The percentage in March 2020 would have been quite a bit more than the yield percentage today. The number is not important for any other reason than to articulate that my portfolio tends to be more broadly market based than yield based. The number itself has no other value.

FWIW, other than my broad market index ETFs like VTI for my ex-Canada holdings, I pick my Canadian holdings based on Return on Capital Employed, along with Return on Equity, P/E ratio, large cap, etc and whether it pays a dividend of some value. I do NOT pick holdings based on dividend yield as a primary indicator. Hence why BAM.A, ATD.B, CN, etc are in my portfolio along with my banks, lifecos, telecoms and pipelines. Sector diversification to some degree is important. I do not keep track of current yield, dividend payout dates, or anything of that sort. I simply have no need to know. I sell about one equity per year to keep my cash reserve topped up to comfortable levels. I have no aversion to crystallizing holdings if that is what is needed to top up my cash flow needs for the year.

Added: Given we are almost 50% through the year, I just decided to run a Quicken report on Investment Income. It says my YTD income yield is 1.1%, so I can approximately double it for full year to 2.2%. Also given some of my holdings only distribute semi-annually or annually, I will top that up another 10% to about 2.4%. Pretty good guess.

Added2: If I was starting investing all over again, I'd own VGRO* or XGRO* and an HISA for my cash reserve. VGRO's current 12 month yield is 1.81% so I am already tilted dividend/distribution heavy to the market.
* Actually VEQT or XEQT in earlier years migrating towards VGRO or XGRO near retirement.


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## MrBlackhill (Jun 10, 2020)

I think I get both of your points.

To me, I agree that 20% is 20%, no matter the portfolio and that's true when we talk about performance (unless the portfolio is big enough to have liquidity issues).

On the other side, someone who saves $10k a year and made +20% the first year on that $10k will be happy to have a $2k bonus worth 1/5 of his yearly savings. But after a few years, once his portfolio is worth $100k while he's still contributing $10k a year, a +20% will be a $20k bonus worth 2x his yearly savings. So, to him, that +20% is more meaningful and the first +20%. Same applies if he sees his portfolio drop -20% on year 1 vs on year 10. So, as his portfolio grows, his stress level will increase. (But, if he sees everything as percentages only, then his stress level will decrease)


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## AltaRed (Jun 8, 2009)

I doubt very much the Weston family cares at all about $100M daily market fluctuations in their $8-10B net worth. It might be more attention getting with $1B (10%) market fluctuations but it has nothing to do about annual employment earnings which may be only a few million dollars per year.


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## agent99 (Sep 11, 2013)

AltaRed said:


> I will continue to disagree with you on ratios. For someone starting out, a $2k annual gain on a $10k portfolio is a big deal. It is every bit as significant to that person as is a $20k annual gain on a $100k portfolio for someone who has been investing for 10 years and has accumulated more assets. That 20% is just as meaningful for that person at that time. It is kind of offensive to suggest it is not as important


It is even more offensive for you to say that I had said it was not meaningful to that person. What I said was that the percentage was not meaningful in a forum where members have widely different portfolio values.

And you are defeating your own argument where you said that a $35k loss on a $100k portfolio would not be more traumatic than a $1M loss on a $3m portfolio when it would be very important, just like that $2k gain on a $10k portfolio.

Ratios and percentages are meaningless without the actual numbers they represent. I don't know why or how you could argue with that.


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## AltaRed (Jun 8, 2009)

Sorry, but you misread what I wrote. A 20% ($2k) gain on a $10k portfolio is just as important to the young investor as a 20% ($20k) gain on a more mature $100k portfolio. What is inconsistent?

In forum discussions, percentages level the playing field, making discussion of the smaller numbers of a newbie investor as important as the larger numbers of a wealthier investor. Example: Larry81 talks about big numbers in a recent thread. On an absolute basis, his recent gains on XEG are large, but he (other than bragging rights) doesn't see that as being all that significant. He may well have a $10M portfolio so that his XEG holding is a mere 10% of it. In that situation, I'd let my 10% holding continue to run as well....as he says he plans to do. 

The healthier discussion for the forum in that thread would be a discussion on him achieving >100% gain in the value of XEG over the past year.


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## MrBlackhill (Jun 10, 2020)

AltaRed said:


> I doubt very much the Weston family cares at all about $100M daily market fluctuations in their $8-10B net worth. It might be more attention getting with $1B (10%) market fluctuations but it has nothing to do about annual employment earnings which may be only a few million dollars per year.


Yeah well that's because they don't even need their employment earnings to live.

But to someone who makes $50k a year, has $0 savings to start, then makes +20% on his first year saving $10k, it's a good start, but it'll be even more meaningful a few years from now if he makes +20% but on a $100k portfolio.

The difference here is how much time it took you to get there. And how much work time you are saving yourself with those profits.

That's the part where I agree that +20% will have different meanings.

On the other side, the absolute value is also meaningless. If you made +$10k profits... ok, but +$10k profits on $5M is bad, while +$10k profits on $50k is good.

If you give $100k to charity, are you generous? Well, if your net worth is $100M, it's just pennies to you. If your net worth is $1M, then it's pretty generous.

That's the part where percentage are required to be meaningful.

And if guy A made +$10k and guy B made +$20k, we don't know who performed better. But if guy A made that with $20k, while guy B made that $50k, then guy A is better. That's where we need percentage.

We just need both, the percentage and the absolute value.


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## agent99 (Sep 11, 2013)

AltaRed said:


> It is kind of offensive to suggest it is not as important


It is your post that is offensive!!!! You accused me of an offensive post. And you did not retract it.


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## agent99 (Sep 11, 2013)

MrBlackhill said:


> We just need both, the percentage and the absolute value.


Pleased to see that common sense prevails


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## pwm (Jan 19, 2012)

Both percentage and absolute can have significance depending on your circumstances. When I was younger and saving for retirement, a 10% drop meant more to me then than it does now.

I always laugh when the evening newscast says the Dow *plunged *340 points and the NASDAQ was *also lower*, down 280. What they don't show is the DOW was down 1% and the NASDAQ was down 2%, which is twice as much, but a smaller absolute number. 340 is a larger number that 280 is all they know. The problem is the people who direct the evening news are right-brained and are all numerically challenged.


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## AltaRed (Jun 8, 2009)

It is the same nonsense when CBC reports bank earnings (profit) to stir up the financially illiterate. The number is not meaningful except for headlines. As shareholders, we know that it is primarily EPS that is meaningful.

This thread has gotten well off topic...but suffice to say, I will continue to primarily use properly characterized percentages in my posts. It is the context that is important.


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## james4beach (Nov 15, 2012)

agent99 said:


> Regarding James' post - He worries too much.


Nope. I've just had many overconfident, equity-heavy friends who got destroyed in the market including at least two who sold everything during the 2020 crash.

I watched what happened to other equity-heavy investors. That's why I'm cautious and limit my % equities.

Just because it worked out well for you, doesn't mean it works for everyone. And just because it worked for you *in the past*, does not mean it will work out so well for you in the future.

agent99, I think you are also overconfident about the prospect of stocks going forward. You should read more market history. There have frequently been very long stretches of poor equity performance, both in the US and everywhere else in the world.

Me... I'm positioned to survive. I survived the 2000 and 2008 bear markets by being a cautious investor, and MANY of my friends have suffered tremendous losses, or capitulated and left the game long ago. I'm still in this game thanks to being conservative.


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## james4beach (Nov 15, 2012)

pwm said:


> Question for J4B: Why should I care what price other people are trading my stocks at when the dividends remain the same?


Because your dividends will correlate with the broad equity prices, generally speaking.

There may be times when you are lucky and they don't correlate (like 2008 in Canada) but generally, globally, dividends correlate with bull and bear cycles. That means that if you get a severe bear market in equities, your dividends are in danger as well.

In the US, dividends were cut both during the 2000 and 2008 bear markets.


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## AltaRed (Jun 8, 2009)

While it is true dividend/distribution streams were cut to a degree, it wasn't nearly as much as market prices. They provide some ballast in the portfolio as indicated by XIU 20 year history here. I expect SPY might show something similar for the USA. Regardless, few are in the position to rely on investment income streams alone so market prices do matter.

Ultimately, fixed income provides some ballast (volatility reduction) to the portfolio and if that makes the difference between panic selling vs holding still, it has served its purpose.


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## james4beach (Nov 15, 2012)

AltaRed said:


> While it is true dividend/distribution streams were cut to a degree, it wasn't nearly as much as market prices. They provide some ballast in the portfolio as indicated by XIU 20 year history here. I expect SPY might show something similar for the USA.


The XIU dividends actually held up better than SPY dividends, as I recall. It's true that dividends weren't cut (in the US) by as much as stock prices, but they still are correlated.

If you can live purely off the benchmark index ETF dividends, I think that's a great situation to be in and other than maybe accounting for a 20% to 30% haircut in dividends, you probably don't have much to worry about.



AltaRed said:


> Regardless, few are in the position to rely on investment income streams alone so market prices do matter.


Yes. It's really hard to ignore market prices. You might ignore them for a while, until your dividend payers start having trouble (during a severe recession). One only has to think back to the oil & gas market.

For most investors, it's going to be next to impossible to escape from the reality of market prices.


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## Gator13 (Jan 5, 2020)

We are in a position where we should be able to live comfortably off our dividends when we retire in a couple years. Because of this we don't really have any bonds to speak of other than very small holdings in a couple balanced funds and some in a managed account. That being said, we have set aside two years of living expenses in HISA's. We'll draw from these funds for our monthly & annual expenses and backfill with dividends from our taxable and registered accounts. 75% of our dividends will come from taxable accounts so we will have surplus funds from our RRSP's as well as our TFSA's as a safety net. (CPP at 70 is also a safety net) We will both be under 60 when retire so we want to be cautious. Once we settle into retirement we can start drawing on the principal and will ramp up our spending and giving. Our portfolio yield is about 3.8% and the caveat to our plan is that we are fortunate enough to have a reasonably decent sized portfolio. I'm positive there are better strategies, but this is the path we're headed down.

We review our finances monthly. Review cashflow, pay bills, track expenses, update net worth, log investment income, etc. It takes no more than two hours per month. It's two hours I always look forward to.


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> agent99, I think you are also overconfident about the prospect of stocks going forward


It's not about being overconfident about the stocks - we have enough data to know how stocks behave -, it's about being confident about how *you* behave while holding stocks. And I'm pretty sure @agent99 is experienced enough to know about his investor profile.

About the people you know who lost money with stocks, it's not the stocks that made then lose money, it's how they behaved.


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## agent99 (Sep 11, 2013)

MrBlackhill said:


> It's not about being overconfident about the stocks - we have enough data to know how stocks behave -, it's about being confident about how *you* behave while holding stocks. And I'm pretty sure @agent99 is experienced enough to know about his investor profile.
> 
> About the people you know who lost money with stocks, it's not the stocks that made then lose money, it's how they behaved.


I seem to recall James posting about those friends several times. Young guys putting money into hot stocks expecting to make a small fortune. That is not investing.

James thinks I am overconfident about stocks?? How would he make that judgement? He doesn't know what we own. He thinks I should read financial history. He should try living through it!

I actually think the markets are well overblown and expect, or at least won't care much if they retract 30 or 40%. The dividends from the kind of companies we own will more than likely continue to flow. Some may not increase as they have in the past, and a very few may be cut. When did a major Canadian bank last cut their dividend? Or a major Canadian company default on their preferreds?

What we are more likely to experience, is high inflation. We are already seeing that. The equity we own will be worth less as interest rates increase to control inflation Our income growth may stall and goods and services will cost more. We may even have to sell some equity  

Mind you, taking James' lead and becoming ultra conservative, we could just cash in and put our money under the mattress or in GICs paying negative real returns. Draw what we need over and above CPP/OAS. Seriously this could be the right thing for us at our age 😞 But not much fun!


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## james4beach (Nov 15, 2012)

agent99 said:


> James thinks I am overconfident about stocks??


Did you have any significant money invested in stocks from the 1960s through to the 1980s?



agent99 said:


> Mind you, taking James' lead and becoming ultra conservative, we could just cash in and put our money under the mattress or in GICs paying negative real returns.


If you think I'm "ultra conservative" with 30% in stocks and another 20% in gold, that's pretty funny. I've got 50% of my net worth in very volatile assets.

An investor could have a 50/50 portfolio and still get a tremendously good return. There's no need to have a ludicrously high % in stocks to get decent returns.



agent99 said:


> I seem to recall James posting about those friends several times. Young guys putting money into hot stocks expecting to make a small fortune. That is not investing.


True, some gambled. But others had index ETF portfolios which were very sensible investments. They were investing properly. The volatility was just too much for them, so they couldn't stick with it.


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> The volatility was just too much for them, so they couldn't stick with it.


That's not the stocks to blame, they should just get to know themselves.

That's as if someone scared of heights would follow his friends at the amusement park going in rollercoasters and then he would blame the rollercoasters for being too high...



james4beach said:


> There's no need to have a ludicrously high % in stocks to get decent returns.


I've got nothing against your all-weather allocation. I would even suggest it to most average investor. You'll do great risk adjusted returns with low volatility. But why do you keep dismissing those who are taking more risk than you? There's people out there willing to and able to. And just from this thread here we can see that there's a majority of people who decided to avoid bonds. If they avoid bonds but can't take the added volatility, then it's bad, but otherwise there's nothing wrong with it.

Yes, decent returns, but the difference between someone who invested a lump sum at 7% for 40 years and someone who invested at 8% is +45% more money. Or, we could also say that the one at 8% takes 35 years to reach what it takes 40 years at 7%.

We keep talking about the compounding effect and financial advisors keep talking about the "exponential growth", saying that the longer you invest (the sooner your start), the better. All good advice, but it's better for them too as you pay more MER through time. No one talks about the "power function" (which is even more basic, actually) and how to reach your goal _faster_. (And I'm not talking gambling-like faster...)

Exponential means that for a fixed rate of return, the longer you hold it, the better. For instance, that's y = 1.07^x
Power means that for a fixed amount of time, the higher the fixed rate of return, the better. For instance, that's y = x^40

Understanding that you should start investing early is easy. Once you understood that, the next variable you'll want to optimize is... your rate of return. Because that's the hard part where you must understand risk management and your own behaviour.

We keep showing this kind of graph and saying: "See! If you invest at 7% for 40 years, you'll 15x your money, but if you invest it for only 20 years, you'll only 4x your money."
(x-axis is time in years, y axis is total return multiplicator, based on 7% annual return)









But we rarely see this kind of graph and say : "See! After 40 years, if you've performed 7%, you'll 15x your money, but if you've performed 10%, you'll 45x your money."
(x-axis is annual return in percentage, y axis is total return multiplicator, based on 40 years invested)









And for those even more advanced understanding logarithms, there's also this function were the total return is fixed and the graph shows how many years it takes for each annual rate of return to reach that goal. That's a better graph because most people have a goal, like becoming a millionaire.

This graph tells you how many years it'll take you to 15x your money for each annual rate of return. "See! After 40 years, if you've performed 7%, you'll 15x your money, but if you've performed 10%, you'll 15x your money after only 29 years."
(x-axis is annual return in percentage, y axis is time in years, based on reaching 15x total return multiplicator)









And it's still too basic because that's just for a lump sum, you can then add more variables as your annual contribution, for instance. So this graph below shows the relationship between annual rate of return and number of years to reach $1M if you invest $5,000 a year. "See! If you invest $5,000 a year, after 39 years, if you've performed 7%, you'll reach you million but if you've performed 10%, you'll each your million after only 31 years."
(x-axis is annual return in percentage, y axis is time in years, based on reaching $1M final goal while adding $5,000 per year)


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## agent99 (Sep 11, 2013)

James asked: "Did you have any significant money invested in stocks from the 1960s through to the 1980s?" 

I wouldn't normally answer personal questions, but I will first ask one - James what was your _personal _experience during that same period? 

I graduated in 1961. I started investing back then in a small way and have done so for what is that? 60 years? Significant money?? As we discussed in the earlier discussion, the amount I had invested initially was significant - to me.


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## james4beach (Nov 15, 2012)

agent99 said:


> I wouldn't normally answer personal questions, but I will first ask one - James what was your _personal _experience during that same period?


I was not investing during the 60s and 70s, and most people around me weren't either. This was one of the toughest markets in modern history.

Since I didn't experience it personally, I have read about it and heard what other people had to say. I've also looked at performance history including the performance posted by Buffett's Berkshire Hathaway. The results were absolutely terrible during some of those bear market years.

Buffett got the crap kicked out of him, and he's the best investor alive today. Just look at his old annual reports to see the evidence. Those were BAD years.



agent99 said:


> I graduated in 1961. I started investing back then in a small way and have done so for what is that? 60 years? Significant money?? As we discussed in the earlier discussion, the amount I had invested initially was significant - to me.


You are definitely one of the few investors I have ever encountered who has been in the market this long, including the 1970s.

I retract my statement about *you* being overconfident about stocks. Clearly you have seen some of the worst conditions out there, so you know what's involved.

Most investors my age, though, are overconfident. And even most of the older investors I've met started investing in the 1990s, and are overconfident about equities.


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## Benting (Dec 21, 2016)

To me, there are 2 most important factors of investing.

1. Sleep factor. Can you have a good night sleep if your investment goes down 10, 20, 30% or more ?

2. Interest rate. I still remember we used to buy Canadian Saving Bond with interest over 8% in the 80s. So, would you buy dividend stocks that pays 4% instead ? Do you think asset allocation should be flexible base on the interest rate. 

Then of course, the length of the investment including after retirement year. When you need the money for yearly expense, you only have to sell little part of it. And still have the rest to grow....

My $.02


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## james4beach (Nov 15, 2012)

Good points @Benting and the time horizon is a very important consideration. One pattern I have seen in life is that everyone starts off thinking they have a 30 year time horizon, but few people do in practice. That's what I've seen with people, which is another reason I think high equity allocations are generally a bad idea.

It's very rare to actually be able to stick with a stock portfolio for 30 or 50 years, without major interruptions to it. Doesn't matter how brave you are. This is especially true when you have smaller amounts of money, and might actually need that money.

So when someone posts a thread asking why hold any bonds/GICs if my horizon is 30 years, the first thing I point out is that your time horizon may NOT turn out to be 30 years. It might turn out that you need that money in 5 years, despite your intentions today.

Anyway, I might not be as experienced as @agent99 and @pwm but I've been on internet stock boards for as long as they have existed, about 22 years. One funny thing I've seen is that people always love stocks, at all time highs. Just human nature.


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## agent99 (Sep 11, 2013)

Benting said:


> To me, there are 2 most important factors of investing.
> 
> 1. Sleep factor. Can you have a good night sleep if your investment goes down 10, 20, 30% or more ?
> 
> ...


Good points,

1. May depend on just where you are in your investment journey. In retirement with mostly income holdings, the actual portfolio value is not too important if the income it throws off continues and you have sufficient to avoid having to sell.

2. Interest rates. If bonds or gics are offering better returns than equities, by all means buy them! They are just another form of security. I recall CSBs offering high interest rates. GICs did too, I had one that paid 15%. That was just a short blip in rates, but that GIC kept paying 15% for 5 years. I doubt any other investment would have done better. So just go with whatever offers the best return, taking into account risk.

Regarding your last point - If you hold mainly growth stocks (or funds) and your plan is to sell those at regular intervals for yearly expenses, then I can see drops of that magnitude being stressful. You would have to sell stocks at low prices, perhaps at a loss. Solution - don't expose yourself to the problem! Or at least go with a blend of dividend payers, growth and cash so you don't have to sell as much, or at all in a large downturn.


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## like_to_retire (Oct 9, 2016)

agent99 said:


> I recall CSBs offering high interest rates. GICs did too, I had one that paid 15%.


I use to work for the government, and every year they would allow the employees to buy that year's Canada Savings Bonds and the amount would come off our cheque each week until it was paid off and then we would get the certificate. The manager would come through every year asking the employees who wanted to sign up.

I remember in 1981 when the interest rates were going through a peak, that they couldn't get anyone to sign up since that year's CSB rate was only 19.5%. Everyone laughed and said you'd be crazy to take that rate since we all knew the rates would be going much higher.

No one should get too comfortable with todays low rates.

ltr


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## james4beach (Nov 15, 2012)

like_to_retire said:


> I remember in 1981 when the interest rates were going through a peak, that they couldn't get anyone to sign up since that year's CSB rate was only 19.5%. Everyone laughed and said you'd be crazy to take that rate since we all knew the rates would be going much higher.


Back in 1981, inflation was really getting out of control and everyone was certain that inflation would be much higher in the future. Everyone loves timing interest rates, so people said they didn't like the 19.5% rate because they were positive the rate would be even higher, if they just waited a bit. They thought it would, obviously, be well over 20% with inflation going as high as it was.

And why wouldn't it be? Every day in the media, there were articles about how inflation is out of control and only getting worse. So it was obvious that rates were going higher. *I'm talking about 1981.*

Now fast forward to just a few years ago. People saw 3% GIC rates (which I repeatedly posted about at CMF at the time) and people said -- we love timing interest rates and inflation! You'd be crazy to lock in a 5 year rate at 3% when rates are surely going to go higher any moment.

Your example, just like the CMF threads, proves that people cannot time interest rates. It shows the failure of market-timing efforts.

The correct fixed income strategy was the same in 1981 as it is today. *You routinely buy and roll over securities without trying to guess at what inflation or interest rates might be next year, acknowledging that you cannot predict interest rates.*

That's what a 5 year GIC ladder, or a bond fund, do, and that's why they are good strategies. Don't make the same mistake as the market-timers in LTR's 1981 story. Just like timing the stock market, people are unable to reliably time the bond market, interest rates, or inflation.


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## hboy54 (Sep 16, 2016)

james4beach said:


> One funny thing I've seen is that people always love stocks, at all time highs. Just human nature.


I love stocks at all time lows ... for buying. All time highs for selling. Sure for a while last year my net worth reversed about 15 years, but the 6 figure addition to my BTE holdings at $0.54 will likely be the source of my donation shares in a year or two at some number over $5.


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## agent99 (Sep 11, 2013)

hboy54 said:


> I love stocks at all time lows ... for buying. All time highs for selling. Sure for a while last year my net worth reversed about 15 years, but the 6 figure addition to my BTE holdings at $0.54 will likely be the source of my donation shares in a year or two at some number over $5.


You mean they won't recover to the $40.52 we paid for them in wife's TFSA? 😢


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## Jimmy (May 19, 2017)

It looks like this is the consensus from the thread and these are the rules:

If you are over 50 and you will need to sell assets for income then being 30-40% in fixed income may be required.

In all other cases bonds, w yields now at 1.5% so you lose $ in real terms, they are just plain bad investments to be avoided.

There is no market 'timing' issue. If an investment has poor future returns you don't buy it. You should not even look at these investments until they make at least 3% if at all.


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## agent99 (Sep 11, 2013)

Fair enough Jimmy. 

For those over 50, or at least close to retirement, I wouldn't use a percentage of fixed income. I would make an estimate of how much annual income you could get by with if equity markets really crashed.

Assume zero income from equities (very unlikely). Then calculate how much you would need over and above CPP/OAS/pensions to reach your annual required income estimate. 

For example, if you figured you could get by on $60k pa and your CPP/OAS/Pension income was $30k pa, then you would need another $30k pa. But for how long? 5 years, 10 years? If we take 10 years for markets to recover and you had $300k in cash-like fixed income, ignoring income on FI, you could draw that down over 10 years. You wouldn't _have_ to sell off equity 

Of course, equities wouldn't totally crash, nor would their dividends drop to zero, so this would be a very conservative approach. 

That $300k in cash-like fixed income could be 50% or 30% or ??% of your nest egg. As discussed previously in this thread, percentages on their own can be very misleading.


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## Gator13 (Jan 5, 2020)

As I have previously mentioned, I am a dividend investor. We plan to live off our dividends without needing to touch the principal until mandated to make withdrawals from our registered accounts due to age.

I have tried FireCalc and VPW and we can withstand a 50% loss. As part of our plan we will start retirement with 2 years of living expenses on hand. We will live on these funds and backfill with dividends from taxable accounts and RRSP accounts. We will not draw from our TFSA's and will continue to make the annual maximum contribution. We will only withdraw about 65% of the dividends produced in our RRSP's. Also, our CPP at age 70 will also act as a safety net. 

Based on our situation, I don't feel the need for 25% fixed income and 25% gold. A 5 year GIC at 3% doesn't really interest me.

How would If we ever be able to retire if we can't feel comfortable with this scenario? If the banks, utilities, etc all drop their dividends to zero, the entire financial system would have to be in massive upheaval. What would anything be worth?


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## AltaRed (Jun 8, 2009)

I agree with post #69, that in this situation, use an absolute for how cash reserve (fixed income) to hold to cover X years of expenses in the event of a bear market. It is what I have done throughout retirement, but recognize as well how well one can handle portfolio volatility. Too much roller coaster equity can create insomnia. Know thyself and balance accordingly.


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## agent99 (Sep 11, 2013)

Gator13 said:


> How would If we ever be able to retire if we can't feel comfortable with this scenario? If the banks, utilities, etc all drop their dividends to zero, the entire financial system would have to be in massive upheaval. What would anything be worth?


I hope you didn't read that into my post above. 

I suggested ignoring equity as a means of providing income as a way of calculating how much cash equivalent fixed income you might like to have available to carry you through a significant downturn once retired with no other sources of income. 

I would choose a bare bones income using that method. If your dividends are mostly maintained, then you wont have to deplete your fixed income reserve during such a downturn in equity values (been through that!)


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## GreatLaker (Mar 23, 2014)

I also follow the tactic of determining a minimum dollar value of FI to cover x years of conservative spending (after CPP/OAS/ DB pensions). The big question then is how many years is X? I have seen people post about keeping a 2-year cash wedge, but that does not go too far in a long deep bear market like the lost decade of the 2000s or the stagflationary 1970s. Maybe I have read too much William Bernstein and Bill Bengen which has educated me on some of the bad economies and markets of past decades. Maybe central banks and finance departments have learned enough about fiscal and monetary policy that recessions and depressions are a thing of the past. Maybe it's different this time.

If I only spend the income from my portfolio and never touch my capital, I will reach the end of my retirement with several times as much money as when I started retirement. That's not in my plans. I don't want to die rich. I want to live wealthy.


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## AltaRed (Jun 8, 2009)

GreatLaker said:


> If I only spend the income from my portfolio and never touch my capital, I will reach the end of my retirement with several times as much money as when I started retirement. That's not in my plans. I don't want to die rich. I want to live wealthy.


I fully agree with your sentiment but some folk seem to have other priorities and/or the portfolio size to do that without much, if any compromise on cash flow spend. We have almost tripled our spend over the past 15 years of retirement because we can and we have become to like it. That all said, that spend will slow down as we age if for no other reason than a $35-50k adventure no longer is feasible.

I think the X in the cash wedge model needs to be qualified. 
1) Is the X based on the spread (gap) between 'need' and current investment income stream? Or a more conservative Y% of current investment stream just in case dividends/distributions get cut in an equity bear. 
2) Alternatively, is the 'need' I mention based on current spend rate? Or a reduced amount of discretionary expense where one would intuitively cut back on some expenditures? Or does 'need' simply cover base expenses with a minimal amount of working class discretionary spend? 
3) Not all equities will be in a bear for those holding individual common stocks such as consumer staples, or maybe preferred stock will be holding its own. Even in the March 2020 dive, I had some holdings that held up pretty good, e.g. less than a 10% decline. Those could be clearly harvested to meet cash flow needs. Just because an equity is off its 52 week high does not make it 'untouchable'. 

IOW, there are several outcomes that are not black or white.


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## agent99 (Sep 11, 2013)

GreatLaker said:


> If I only spend the income from my portfolio and never touch my capital, I will reach the end of my retirement with several times as much money as when I started retirement. That's not in my plans. I don't want to die rich. I want to live wealthy.


I don't want to die rich either. Perhaps a possible objective could be to not have any more capital, in real terms, than you had at start of retirement? $1million of capital would need to grow to 1.8Million at current BoC target of 2% inflation. But if we look at the 30 years from 1960-1990, $5million would have been needed in 1990 to match $1miilion in 1960. That was 5.5% average inflation for 30 years! Will this happen again?

I realise not everyone can get by, living off income from their capital (plus CPP/OAS/etc). As capital is drawn down, the real value of retirees capital and the income it produces will gradually reduce in real terms. This may work out, but it is hard to predict future inflation rates and family life events. Best not to overspend, particularly in early retirement years.

We are 18 years into retirement, and spend all we need to enjoy a comfortable active yet simple retirement. By nature, we are both quite frugal. No fancy trips, No expensive cars. No spending for the sake of spending! If it turns out the capital we have accumulated is not needed, our children and grandchildren will benefit. Nothing wrong with that, in my mind.


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## pwm (Jan 19, 2012)

_No spending for the sake of spending! If it turns out the capital we have accumulated is not needed, our children and grandchildren will benefit. Nothing wrong with that, in my mind._

We are the same agent99. We lived a frugal lifestyle for 50 years and 16 years into retirement, continue to do so. We could live quite well on either my company pension and govt. benefits or the investment income alone without anything else. And yes, our children and grandchildren will receive a large inheritance some day. However, in addition to the unknown of future inflation which you mentioned, there is also the unknown factor of medical expenses later on. The amount of their inheritance will depend on both those factors.


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## AltaRed (Jun 8, 2009)

We are the opposite 15 years into retirement. We are not irresponsible spenders, i.e. we hold on to our vehicles for many years, eat leftovers, and shop at Superstore, but we are going to enjoy the fruit of our labour while we have the health and interest to do so. Our entertainment, dining out, recreation and travel portions of our budget are about 50% of our 6 digit spend and we will continue as long as we enjoy doing so. We have 5 star vacations and fly business class to accommodate our creaky bodies. We just bought a big screen QLED TV and have ordered a $15k hot tub for our deck. There is plenty of time to be old and frugal and disinterested, while still making sure we have plenty of reserve for late-in-life health crises. I have no intention of being on my death bed saying 'I wish I would have.....'.


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## pwm (Jan 19, 2012)

Do what makes you happy AltaRed. Everyone is different. As the French say: chacun à son goût.

I on the other hand, don't like restaurants, hotel rooms, flying, airports, or driving all day. It's not that I don't want to spend the money on those things, it's that I don't enjoy it. A cruise ship would be like a form of torture for me. I traveled a lot for my job and don't want to do so anymore. Also I guess being an RCAF brat growing up, going to 4 different high schools in 3 different countries and 2 provinces, moving 8 times before age 17, had something to do with that. (A move BTW only counts if you go to a different time zone or country).


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## Gator13 (Jan 5, 2020)

agent99 said:


> I hope you didn't read that into my post above.
> 
> I suggested ignoring equity as a means of providing income as a way of calculating how much cash equivalent fixed income you might like to have available to carry you through a significant downturn once retired with no other sources of income.
> 
> I would choose a bare bones income using that method. If your dividends are mostly maintained, then you wont have to deplete your fixed income reserve during such a downturn in equity values (been through that!)


No I didn't. I apologize if it came across that way. My point was more in defense of using a dividend investing strategy. I "hope" our financial situation will allow us to ride out the market downturns that will occur. Your point of annual income actually needed needed is well taken. If needed, we could stretch our 2 years cash reserve to 4 years if needed. That would also assume 0 dividend income from our entire portfolio and not touching the principal. If needed, we are certainly willing and able to adapt our strategy as the years go along.

I don't want to die rich either, but I also want to live with minimal financial stress. For me, that's worth leaving a few dollars in our estate that will benefit others. I have certainly gained a lot from the experience and insight of others on this forum. As others have mentioned, there certainly isn't a one plan fits all solution.


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## agent99 (Sep 11, 2013)

pwm said:


> I on the other hand, don't like restaurants, hotel rooms, flying, airports, or driving all day. It's not that I don't want to spend the money on those things, it's that I don't enjoy it. A cruise ship would be like a form of torture for me. I traveled a lot for my job and don't want to do so anymore.


I could have written that  We definitely don't spend money on things we don't or wouldn't enjoy  

Especially those cruise ships! I am old enough to have travelled between continents when young and single by regular passenger liners. That was THE way to travel back then when young and unencumbered. 1 to 3 weeks on board including meals and accommodation all at about same cost as an airline ticket! Those passenger liners had a total of 600-800 passengers vs 3000-6000 on some cruise ships! 

Watching thousands of passengers disembarking down a gangplank at a tropical island to go and buy tee-shirts (or whatever) reminded me of ants leaving a hive  To each his own. Some people seem to love cruises.


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## AltaRed (Jun 8, 2009)

pwm said:


> I on the other hand, don't like restaurants, hotel rooms, flying, airports, or driving all day. It's not that I don't want to spend the money on those things, it's that I don't enjoy it. A cruise ship would be like a form of torture for me. I traveled a lot for my job and don't want to do so anymore. Also I guess being an RCAF brat growing up, going to 4 different high schools in 3 different countries and 2 provinces, moving 8 times before age 17, had something to do with that. (A move BTW only counts if you go to a different time zone or country).


I moved a fair bit within North America, and traveled a lot in my O&G career, Europe mostly, but find that selective adventures with a group of friends is still highly enjoyable. Combination of social interaction and enjoying new things. African safari, Vietnam/Cambodia, Costa Rica/Panama, Venezuela, Europe. We definitely are not cruisers on any bigger ships, but enjoy river cruises and cutters of 50-120 folk. Best left for a 'travel' thread.

Added: There are so many things that can be done fairly locally too. 2-3 nights at Sparkling Hill Resort | Luxury Spa Resort in Okanagan Valley, BC or the Guest House (villas) at Virtual tour of Burrowing Owl Estate Winery, Oliver, OKanagan valley or at Quail's Gate Lake House https://www.quailsgate.com/lake-house/ as a base to experience wine country. Or fly in to the Wickaninnish Inn Tofino Hotel on the Beach or alternatives in Tofino for a coastal experience. And in dozens of places, golf packages galore for golfers, fly-in fishing, trail ride packages, etc. The only real limitation is money and time.


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## NewbieInvestor88 (Feb 21, 2021)

james4beach said:


> Back in 1981, inflation was really getting out of control and everyone was certain that inflation would be much higher in the future. Everyone loves timing interest rates, so people said they didn't like the 19.5% rate because they were positive the rate would be even higher, if they just waited a bit. They thought it would, obviously, be well over 20% with inflation going as high as it was.
> 
> And why wouldn't it be? Every day in the media, there were articles about how inflation is out of control and only getting worse. So it was obvious that rates were going higher. *I'm talking about 1981.*
> 
> ...


A late neighbour of my family took all his money that he made in a print shop in the early 1980s and got a 16.5% rate annuity - guess who looked like a genius once rates came down, and he lived to be 93 (we think that he didn't die of old age, rather the annuity company sent a hitman).


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## james4beach (Nov 15, 2012)

NewbieInvestor88 said:


> A late neighbour of my family took all his money that he made in a print shop in the early 1980s and got a 16.5% rate annuity - guess who looked like a genius once rates came down, and he lived to be 93 (we think that he didn't die of old age, rather the annuity company sent a hitman).


What if inflation had kept increasing, and stayed high? That's another way it could have played out.


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> What if inflation had kept increasing, and stayed high? That's another way it could have played out.


There's always another way it could have played so it's not worth stressing about it.

If you truly want to say "what if", then continue elaborating and tell us what would have happen to Canada if inflation rate kept increasing during the 80s and the 90s, resulting in over 20+ years of high inflation. Maybe the CAD would've disappeared. Maybe our economy would've collapsed. What if?

There's always a possibility of an extreme case.

When we ask ourselves too many "what if" for every nearly improbable case, we end up not being able to take rational decisions. What if you wake up every morning asking yourself "what if I die today", then followed by "what if I live 100 years". Thinking of both extreme cases leads to nowhere so you end up planning for the average case (the most probable case), which makes more sense.


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## pwm (Jan 19, 2012)

Right. Always plan for the most likely scenario. Take a look at my graph in post #33. Where do you think that data line is most likely to go from here? That's why I'm sitting on a large amount of cash right now in HISAs.

It doesn't matter If that data line was the average January temperature in Winnipeg for each year or total rainfall in Kelowna in August, anyone can see it will revert to, and more than likely fall below that trendline. Probably very soon.


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## james4beach (Nov 15, 2012)

pwm said:


> It doesn't matter If that data line was the average January temperature in Winnipeg for each year or total rainfall in Kelowna in August, anyone can see it will revert to, and more than likely fall below that trendline. Probably very soon.


I think the execution of your strategy (timing interest rates) might turn out to be difficult.

Let's say in a year, bonds/GICs yield 3.5% and inflation is reading 4% and on a rising trend.

Would you buy then?

@MrBlackhill same question for you. This is a very likely scenario, nothing outlandish about this. Would you buy then, or not?


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## james4beach (Nov 15, 2012)

AltaRed said:


> Gordon Pape is just another writer focusing on financial matters like dozens of others in the field. Like others, he is worthy of hearing what he has to say but one must just take it as more data/information.


Pape is like most people in the financial pop culture and media, in that he promotes active strategies and doesn't like passive investing. He's loyal to the mutual fund industry, and has a long history with them. He does not like the Couch Potato concept. Does anyone know which actively managed mutual funds Gordon Pape endorses? I would love to know.

He published a book and started endorsing it in 2012. Maybe it's worthwhile looking at how dumb old passive investing -- a big mistake according to Pape -- has performed since then. Plugging in a basic couch potato 60/40 allocation, using ETFs available at the time, I see that the performance since then is 8.4% annualized (that's a 6.3% *real return*).

8.4% CAGR is a fantastic 10 year result using the technique Gordon Pape hates. It's kind of funny that one of Pape's justifications for disliking ETF indexing is his own attempts at an ETF portfolio from 2008-2011. After 3 years of low returns, he decided that indexing isn't a great strategy.

That's kind of a dumb conclusion to come to, isn't it? Any educated investor should know that anything can happen in markets over such short periods, and this is a long term game. Gordon Pape reacted to markets the same way other novices do. After a couple years of bad returns, he got flustered and wrote a book talking about how everyone is screwed in this modern market. And he gave up on his own indexing, even though he would have had fabulous returns if he just had the intelligence to stick with it.

Honestly, these are rookie mistakes. And this guy writes columns and books that other people read and take seriously? That's sad.


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## Jimmy (May 19, 2017)

Pape has a buy and hold portfolio that returned 12.6% for the past 9 years. It has 11% in XBB. If you adjust your 60/40 indexes to hold 11% bonds, your indexes return 10.85% over the same 9 year period.

No surprise his lazy portfolio easily beats passive indexes.


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## Jimmy (May 19, 2017)

His Growth portfolio returned over 27%/yr over the past 8.5 years.



> We created a Growth Portfolio for my Internet Wealth Builder newsletter in August 2012 with an initial value of $10,000. After eight and a half years, we’re showing an average annual compound rate of return of over 27 per cent.


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