# I'm getting creamed in my bond etf's



## Pluto (Sep 12, 2013)

When is this bond rout going to end? 
Is the bond rout implying a coming stock rout?


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## TomB19 (Sep 24, 2015)

The bonds I hold are fine. There is nothing wrong with bonds. The problem is with bond ETFs.

About six months ago, I realized bond ETFs can go down indefinitely, even beyond the maturity date of the longest term bond and even when none of the bonds default.

To start, you may want to read this:

http://canadianmoneyforum.com/showthread.php/100866-Question-on-ETF-theory


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## james4beach (Nov 15, 2012)

Nobody can predict these things. But it might make you feel better to know that bond funds have dropped _worse_ than this before, and it doesn't mean they won't still show good returns going forward. These declines are not unheard of. Additionally bond funds can still have good returns in periods of rising interest rates because of their ability to reinvest maturing bonds at higher yields.

Currently XBB is down 4.4% since the summer's high. But look back at 2013 and you'll see that XBB had declined 5.7% at one point. Back then, everyone said that bonds are toast and the bond bull market is over. And yet XBB still performed very well in the following years.

What I'm saying is, the recent decline in bond funds is part of normal volatility. If it concerns you, check what your maturity or duration is. I would recommend the typical VAB and XBB kind of funds (10 year avg maturity) as opposed to long term bonds.


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## BoringInvestor (Sep 12, 2013)

I have no comment on the future prices of bond ETFs.


Relaying my own experience, I have unrealized capital losses on my two bond holdings (XRB.T down -1.78%, and XBB.T down -0.82%) that I first bought, and have been adding to, over the past four years.

However, when including the dividends received, both my holdings are profitable (XRB.T total return of 3.57% with an annualized money-weighted return of 1.20%, and XBB.T total return of 7.90% with an annualized money-weighted return of 2.67%).


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## james4beach (Nov 15, 2012)

You really have to look at total return with bond ETFs. XBB has a one year return of +0.81%. This is hardly a disaster.

I view this as a buying opportunity for bonds, myself.


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## birdman (Feb 12, 2013)

I view this as a buying opportunity for bonds, myself.[/QUOTE]

James, just wondering why you feel this is a buying opportunity for bonds? I don't buy bonds for my fixed income and stay with GIC's with short maturities (Max 2 yrs) in a low or rising rate environment and 5 yrs in a falling rate environment. It seems to me that the time to load up on bonds is when interest rates are at their high. In do not feel this is the case now and believe that rates will either remain low or increase. Unfortunately I just had a significant 15 yr 6.75% investment roll off but it served me well.


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## Killer Z (Oct 25, 2013)

Frase, curious as to the return you are receiving on your short term GICs? I simply use a HISA, which may not pay as much as a short term GIC, however I feel that the flexibility is worth losing out on an additional 0.25%. Currently I am receiving 0.75% in my TD HISA.


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

The more interest rates go up, the more bond values go down. Since the early 1980s interest rates have gone down steadily from unprecedented high levels, to normal 5 -6% level, to near zero. This year they have inched up half a percent. I wouldn't be investing in bonds. Long term they have nowhere to go but down.


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## james4beach (Nov 15, 2012)

Rusty O'Toole said:


> The more interest rates go up, the more bond values go down. Since the early 1980s interest rates have gone down steadily from unprecedented high levels, to normal 5 -6% level, to near zero. This year they have inched up half a percent. I wouldn't be investing in bonds. Long term they have nowhere to go but down.


That's really not how a bond _fund_ works. All you have to do is look at backtesting from periods where interest rates went up, even for long stretches, and bond funds still showed positive returns.


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## james4beach (Nov 15, 2012)

frase said:


> It seems to me that the time to load up on bonds is when interest rates are at their high.


There's no way to know whether interest rates will go up or down from here. Perhaps interest rates will go down. Maybe these ARE the high interest rates.

Even if you forecast that accurately (which nobody can), it doesn't have the effect you might think. On 2012-07-23 the Cdn govt 10yr benchmark was 1.58% and then on 2014-04-02 it was 2.55%. That's a full one percent increase (huge!) and yet XBB return was +1%.



frase said:


> James, just wondering why you feel this is a buying opportunity for bonds?


Rising interest rates don't necessarily mean negative returns for bond funds. They _do_ mean volatility and temporary drops, though. That's why I think this is a buying opportunity: the long term returns will be fine and there's a buying opportunity on this volatility due to price drop.

My interpretation of the bond math is as follows: long term in a bond fund you get the performance given to you by the yield-to-maturity at the fund's exposure (which is constant and ongoing). As far as I can tell, you don't get worse than this and it's virtually a guaranteed positive return [*].

I think of it as buying exposure to the yield curve. The only choice is _where on the yield curve_ you want to be exposed. The bond market rewards you with higher returns when you are exposed to longer terms. You realize those returns by holding a portfolio long term, where long term generally means "on the order of" the avg maturity of the fund. With higher returns comes more risk and volatility along the way.

Me... I want about 25% of my portfolio in bonds with a time horizon of about 30 years. It's always time to be in bonds. Even if interest rates rise, I expect that VAB will still give me exposure to the 10 year part of the curve, and virtually guaranteed positive return over the long term [*]. Buy the dips.

And bonds always provide asset class diversification and are *always safer than stocks*.

_[*] Caveats. Defaults cause losses (which is why I only hold highest grade). Yields must be > 0%. Bond funds thrive with a normal yield curve and do worse with an inverted curve. If funds face large redemptions, they can also be forced to sell bonds at losses or terminate the fund at a loss -- so you should always go with huge bond funds that are unlikely to face this._


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## lonewolf :) (Sep 13, 2016)

I think stay away from bond etfs. There upside is limited can only go so low then negative interest rates would have negative effects on long term prices. Drop yields down to -100% price might rise though - interest will take away. Bonds increase in price they lose money Bonds biggest mania of all asset classes. Just a pyramid scheme a lot of companies have no intention of paying back there debt. Government keep on borrowing year after year with no intention of ever paying back just a game of hot potato. Stock market crashes more common then bond crashes though when the bonds crash that is when economies really fall apart.


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## birdman (Feb 12, 2013)

Killer Z said:


> Frase, curious as to the return you are receiving on your short term GICs? I simply use a HISA, which may not pay as much as a short term GIC, however I feel that the flexibility is worth losing out on an additional 0.25%. Currently I am receiving 0.75% in my TD HISA.


Firstly, I'm retired and really don't want a lot of risk. Probably about 55% in GIC's, 25% in TSX, and balance in cash and sundry (MIC's and private loan). Most of my cash is with Achieva but have about $20,000. in high interest savings at .85% and will have another $35,000. which I will put in a BNS Momentum Savings at 1.50%. Highest rate on GICS is 3.50% which I locked in for 5 yrs but it unfortunately matures in a couple of months. Earlier this year I put a good chunk in a BNS promo for 2 yrs at 2% and recently put some more in at 1.65% for 2 yrs. Most of our GIC's are now in a RIF with BNS which, when coupled with pension, GIC, and CPP income is ample to provide my wife and I with a comfortable income. To protect my estate my RIF withdrawals should be replaced by interest income and market divies and gains (up 21% this yr). Not sure what I will do with future surplus cash and may give it to the children for investment.
James, I agree that one cannot project with certainty what interest rates will do, however, one thing we do know is that rates go up and they go down. However, in my opinion that about 15-20 yrs ago to me it was a no brainer that rates were going down so all my GIC's were for 5 yr terms. No ladder for me unless rates are stable. Now, I am of then opinion rates have bottomed so I intend to stay short. Furthermore, if rates do go down my guess it will be minimal and not enough to be concerned about. Besides, if I am wrong it really doesn't make any difference to me as I have enough. My wife and I are 70'sh and our investments have been increasing since I retired 15 yrs ago. Having a great year this year and should be up $100,000. Unfortunately, my retirement SERP (which I locked in 15 yrs ago at 6.75%) finishes this month.


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## lonewolf :) (Sep 13, 2016)

Frase your smart to deal with credit union no conflict of interest as everyone is member. Lend money to corporation or government they are not concerned with your money.


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## agent99 (Sep 11, 2013)

james4beach said:


> And bonds always provide asset class diversification and are *always safer than stocks*.


That may be true of some BONDS if held to maturity. But all bonds are not created equal. For example, GOC bonds, Provincials, Municipal, Corporate investment grade, Corporate non-investment grade. And not true of Bond Funds or ETFs that have no maturity.

Rules of thumb: 
- For every 1% increase in interest rates, a bond or bond fund will fall in value by a percentage equal to its duration. 
- For every 1% decrease in interest rates, a bond or bond fund will rise in value by a percentage equal to its duration.

If you hold a bond fund or etf, you can usually look up the average duration for the bonds held on the net - Morningstar, for example.
Borrowed this example from Forbes:


> Vanguard's intermediate term bond ETF (ticker: BIV) has an average duration of 6.54 years, according to Morningstar. Because rates have risen by one-half a percent, we would expect the fund's value to fall by one-half of its duration, or about 3.25%.
> 
> And that's exactly what has happened. At the beginning of November the ETF was trading at about $86.50 a share. Today it's trading at about $83.98 a share, a drop of about 3%. The ETF has ticked up a bit in the past few days. It was down as low as $83.59, a drop of about 3.4%.


Duration is one of those hard-to-understand terms. Google will bring up many hits. Here is one:
http://www.investopedia.com/university/advancedbond/advancedbond5.asp


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## Argonaut (Dec 7, 2010)

Pluto said:


> When is this bond rout going to end?


Probably in 20 years.

Like I've said for a while, bonds are a high-risk low-reward investment right now. Bad place to be.


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## andrewf (Mar 1, 2010)

The logic that individual bonds are awesome and bond funds are horrible makes no sense. Bond funds are just bundles of individual bonds. The main difference being how they roll the portfolio. DIY investors might wait until maturity to roll a bond, whereas bond funds typically roll when the bonds are ~1 year to maturity and most of the juice has been squeezed out of the bond (it has a very low YTM).


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## ian (Jun 18, 2016)

We have PHN Absolute Bond Fund and are pleased with the return.


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## agent99 (Sep 11, 2013)

andrewf said:


> The logic that individual bonds are awesome and bond funds are horrible makes no sense.


I don't think anyone has said that individual bonds are awesome. But when you buy them you do know the maturity date and just what your Total Return will be. They can be called early and you can take that into account by calculating YTW. Try and buy a bond fund or ETF for which you know what the yield will be say 5 years in advance. Right now, I wouldn't touch them with a barge pole.


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## TomB19 (Sep 24, 2015)

andrewf said:


> The logic that individual bonds are awesome and bond funds are horrible makes no sense.


Bonds have a contracted value that can be realized at maturity date. Bond funds do not.

As I understand it, bond funds are not just a fund that holds a bunch of bonds. They may hold some real bonds but they hold synthetic bonds.

I don't see where anyone wrote that bonds are great while bond funds are crap. Your narrative does not seem to match this thread.


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## agent99 (Sep 11, 2013)

ian said:


> We have PHN Absolute Bond Fund and are pleased with the return.


Tried to check that out, but could not fund a PH&N fund with that name. Did find PH&N Absolute Return which invests in equities and bonds, but is now closed to further investors.


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## andrewf (Mar 1, 2010)

ahem



TomB19 said:


> The bonds I hold are fine. There is nothing wrong with bonds. The problem is with bond ETFs.


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## ian (Jun 18, 2016)

Yes, it is PHN Absolute Return fund. 

Mostly short term bonds. Yes, it is now closed off. But the fund manager also manages an RBC fund...not certain which one it is.

We have been working with PHN for almost five years. Very happy with the returns and with their team. So much better than the bank advisor that we had been dealing with. PHN was subsequently bought by Royal Bank however we have not seen any significant changes in service level or personnel.


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## james4beach (Nov 15, 2012)

andrewf said:


> The logic that individual bonds are awesome and bond funds are horrible makes no sense. Bond funds are just bundles of individual bonds. The main difference being how they roll the portfolio. DIY investors might wait until maturity to roll a bond, whereas bond funds typically roll when the bonds are ~1 year to maturity and most of the juice has been squeezed out of the bond (it has a very low YTM).


I agree. And it's important to note that when the bond fund sells its bonds to roll them down the yield curve, they have stopped being volatile and are close to their maturity value. Bond funds are not selling their bonds at a loss. Therefore you have a fund that holds guaranteed return bonds, each of which gives a guaranteed positive return. The summation of them is a guaranteed return too. There are price fluctuations around it, though.

*Here's a thought experiment:*

Imagine you have a "GIC fund" = GIC ladder. Every security has a guaranteed return, and the value only goes straight up over time with no fluctuations. We're all comfortable with this, right? No price fluctuations, and we keep getting whatever returns the GIC market gives us.

Now in your thought experiment replace each GIC with a Government of Canada bond, held to maturity. And extend out the term length. How does this compare to the GIC fund? When held to maturity, there's no difference. It is the same guaranteed return in aggregate... but the prices fluctuate.

If a GIC fund/ladder is so safe and guaranteed, why is the bond fund any different? Some of this is just the perception of risk that comes from prices that change daily.

Bond funds hold the bonds almost until maturity. When they sell them, their prices are converging on maturity value. So I don't see why someone would think that a bond fund is fundamentally more risky than a GIC ladder. They are remarkably similar under the hood: a collection of guaranteed return vehicles.


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## james4beach (Nov 15, 2012)

I still think that bond funds are OK investments no matter the interest rate situation. The main critique should be about duration/maturity, because that's what defines the price fluctuations and creates the potential *you* may sell at a loss (note: not the bond fund, but you are doing this!)

If someone doesn't want to see big price fluctuations with rising interest rates, then go shorter maturity, like VSB and XSB. If you are close to retiring, or may need this money in a handful of years, then absolutely VSB is about as far out in maturity you should go.

Just recognize that you are trading off performance for price volatility. The longer in maturity you go, the better performance you get; that's the yield curve. For example if you have an infinite time horizon, like a large estate or pension fund, then long term bonds like XLB are the best.


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## mordko (Jan 23, 2016)

As with any asset, future bond fund performance depends on whether funds purchased bonds at the right prices.

There is a possibility that bond prices were artificially inflated through direct government actions and regulations which forced pension funds and banks to buy bonds at crazy prices.


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## james4beach (Nov 15, 2012)

mordko: even if those prices are inflated, they will still get a positive return. The bonds are purchased at a positive YTM so they have a guaranteed yield over their lifetime, as long as they don't default.

Bonds are fundamentally different from stocks like that. Stocks do not ever give a guaranteed return. Bonds do.


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## mordko (Jan 23, 2016)

1. Nothing is guaranteed.
2. Bonds have been purchased at negative YTM https://www.ft.com/content/312f0a8c-0094-11e6-ac98-3c15a1aa2e62
3. That's not even accounting for inflation and risk of default.


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## TomB19 (Sep 24, 2015)

andrewf said:


> ahem


I have a few bonds. Not many, but some. in a few years, I will redeem them for the contracted value.

I've also owned XSQ for several months and lost a small amount of money on it.

The point being, bond funds are not equivalent to bonds.

Bless you.


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## GreatLaker (Mar 23, 2014)

TomB19 said:


> I have a few bonds. Not many, but some. in a few years, I will redeem them for the contracted value.
> 
> I've also owned XSQ for several months and lost a small amount of money on it.
> 
> The point being, bond funds are not equivalent to bonds.


The thing is, the value of the bonds you own will also have dropped over the past several months. If you look up the value you will see it. A bond with the same duration as XSQ will drop about the same % in response to any interest rate increase. And the value of a GIC with the same duration will fluctuate the same way. But non-cashable GICs don't trade on a market, so there is no price to look up.

With bond funds it's easy to look up the price, with bonds it's more difficult. But we should not be deluded into thinking you can't lose money on bonds. If you had to sell your bonds now you would get less than a few months ago.


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## TomB19 (Sep 24, 2015)

A bond can be redeemed for contracted value at the end of the term.

As it's been explained to me, a bond ETF can go to zero over time. It probably won't, but it's possible.

In what universe is are these the same? With bonds, the risk is having to hold it to term. With the ETF, the risk is that it can lose value... forever. The ETF exposure isn't 100% loss, as it will pay dividends over time, so there is some limit to the risk exposure.

From what I can tell, the more units of a bond ETF are traded, the more the fund will be arbitraged and the more value will be removed from the fund. In a stable market, a bond ETF will probably perform similar to the holdings it states it has (but probably doesn't have).


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## mordko (Jan 23, 2016)

And why do you think a bond ETF would go down to zero? Think hard.


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## GreatLaker (Mar 23, 2014)

TomB19 said:


> A bond can be redeemed for contracted value at the end of the term.
> 
> As it's been explained to me, a bond ETF can go to zero over time. It probably won't, but it's possible.
> 
> ...


_In what universe are those the same?_ This one. I'll even narrow it down to this galaxy and this planet. Please provide your source for a bond ETF going to zero. Even better, show the arithmetic. 

Bond funds hold bonds. For a bond fund to go to zero, every bond in the fund would have to default. Individual bonds can go to zero, despite the issuer's commitment to redeem at the end of the term. If the issuer becomes insolvent it can default on its bonds. Government bonds are very safe (in Canada at least), but corporations can default on bonds. You might think that buying only investment grade bonds protects against default. But a company's debt tends to get downgraded if it becomes insolvent, then the lower grade bond can default. So high grade bonds become low grade bonds become junk bonds that can default, especially in tough economic times. The likelihood of a blue chip company totally defaulting on bonds is low, but still much higher than a bond fund that holds dozens or hundreds of bonds.


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## lonewolf :) (Sep 13, 2016)

GreatLaker said:


> _In what universe are those the same?_ This one. I'll even narrow it down to this galaxy and this planet. Please provide your source for a bond ETF going to zero. Even better, show the arithmetic.
> 
> Bond funds hold bonds. For a bond fund to go to zero, every bond in the fund would have to default. Individual bonds can go to zero, despite the issuer's commitment to redeem at the end of the term. If the issuer becomes insolvent it can default on its bonds. Government bonds are very safe (in Canada at least), but corporations can default on bonds. You might think that buying only investment grade bonds protects against default. But a company's debt tends to get downgraded if it becomes insolvent, then the lower grade bond can default. So high grade bonds become low grade bonds become junk bonds that can default, especially in tough economic times. The likelihood of a blue chip company totally defaulting on bonds is low, but still much higher than a bond fund that holds dozens or hundreds of bonds.


 Government debt is not safe goggle list of sovereign debt crisis involving the inability of independent countries to meet its liabilities as they became due. I did not double checked my counting & counted fast I counted 288 going back to 1800. The government of Canada keeps going deeper into debt year after year after year. they have no intentions of ever paying back the debt. Someday the music will stop


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## new dog (Jun 21, 2016)

I would not feel safe in stocks if bonds really start to decline and yields shoot up. I only hold short term bonds at this time. However we could be at the end of this long bond bull and if we are then we should see a nice relief rally here and then down she goes.


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## mordko (Jan 23, 2016)

These days governments who manage their own currencies can always pay up bond debt in these currencies. The risk is that currencies can be devalued in the process. Provincial or municipal bonds would be a different matter.


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## new dog (Jun 21, 2016)

Here is a interview with Michael Pento on this matter.

https://www.youtube.com/watch?v=CCyA9RMW5mA


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## GreatLaker (Mar 23, 2014)

Pento lost me when he said Janet Yellen changed her position on interest rates when Trump got elected.

This paper from Vanguard is somewhat less apocalyptic and uses data and analysis to demonstrate how bonds react in response to rising rates. It's worth a read.
Risk of loss: Should the prospect of rising rates push investors from high-quality bonds?


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## Nerd Investor (Nov 3, 2015)

This is another succinct explanation: Repeat After me: “Bonds Don’t Necessarily Lose Value When Rates Rise”.
This deals with bonds, but there's a link within the piece that looks at a similar analysis with bond funds.


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## agent99 (Sep 11, 2013)

In previous link writer says:
"If you take a basic finance course the first thing you learn about bonds is that bond prices are inversely correlated to interest rates. So, when rates rise bonds prices fall and vice versa. This idea is so ingrained into people’s heads that it seems to have become the only thing that anyone can remember about bonds"

If this is not true, one might wonder why it is taught in finance courses. On the other hand, if someone was in the business of selling bonds or bond funds, then they might look for ways to suggest the Finance 101 teachings don't provide a true picture.

I have no problem with buying bonds, even now. But when I choose one, I know when it will mature and I know exactly what my Total Return will be either at maturity or at the earliest call date, which is spelled out in the prospectus.

Lets say we bought a bond with known Total Return that matures in 5 years.

Can anyone who buys a bond fund say just what their Total Return will be 5yrs from now? 

I think not. Just like equity markets, your return will depend on external factors that you have no control over. If you are happy with that risk, fine. But I buy and keep a ladder of individual bonds and debentures to reduce the risk in my overall portfolio. Also have split preferreds, also with known maturity.


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## mordko (Jan 23, 2016)

Someone who buys individual bonds does not know real return he will get on maturity. And it's not just the risk of default. It's the inflation. There is a reason interest rates go up and down. If you cash 2 percent coupon plus bond price on maturity on a 1 year bond but the inflation was 4 percent then you made a net loss.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> If a GIC fund/ladder is so safe and guaranteed, why is the bond fund any different? Some of this is just the perception of risk that comes from prices that change daily.
> 
> Bond funds hold the bonds almost until maturity. When they sell them, their prices are converging on maturity value. So I don't see why someone would think that a bond fund is fundamentally more risky than a GIC ladder. They are remarkably similar under the hood: a collection of guaranteed return vehicles.


I agree, a ladder of bonds/GIC's compared to a fund are quite similar, although there are some differences I can think of. During accumulation years, my opinion is that bond funds (or ETF's) are fine, but in retirement, as soon as you need more cash than the fund can provide, the NAV becomes a concern. 

Consider a long bond fund with a 10 year duration and we experience an interest rate rise of 2%. The impact on the worth of your fund units will be a drop of ~20%. That sort of situation is a bit annoying if you need the capital for income. Real bonds/GIC's kept to maturity don't suffer this problem. If you require more income than the coupons from your ladder throws off, then at each maturity draw cash at 100 cents on the dollar. There's a defined exit point with real bonds and you're able to plan. It's fine to ignore the dropping NAV of a fund (that is inevitable as rates rise) if you only require the income produced by the fund, but if not, you'll be selling depressed units and taking a loss that could go on for years, depending on the duration of the fund. 

And there are other issues. You do pay a premium for the management of a fund, and it's more than you'll pay for individual bonds/GIC's, although others might argue that a fund realizes better costs for its bonds since they're purchased in large sizes. The bond funds do tend to turn over their bonds quite often which results in transaction costs and they very often realize capital gains which will be distributed to unit holders at the end of the year. 

I do understand the attraction of the fund though. I can think of quite a few other advantages.

They have the advantage of automatic reinvestment of distributions, freeing you from having to find a home for the coupons that are thrown off by real bonds. During accumulation, this is a bonus. 

Your hands aren't tied waiting for a real bonds maturity date to get some quick cash. 

Funds have the advantage of offering the ability to sell small quantities to generate cash. 

Short term funds have quick recovery from interest rate increases and they can give you that exposure to a collection of corporate bonds, since many short term funds use corporates to lift their yields. 

Low price of admission for the small investor. Real bonds aren't really worth buying under $10K. 

If you use funds for income, you don't care about the NAV as long as capital isn't required.. 

But, I can also come up with advantages that real bonds have over funds too. I personally think they win out, especially when you're faced with an aggressive withdrawal requirement in a RRIF. I use ladders myself. Some advantages are:

I get a defined rate of return and a know principle at maturity. I don't care about NAVs since a couple times a year a bond matures with its face value. I take the cash I need and repurchase a new bond at the rates of the day. 

Why pay someone to do something you can do yourself at less cost. 

I can control the duration of my holdings. 

I control any capital gain liabilities.

ltr


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## Argonaut (Dec 7, 2010)

You also don't know what your return will be on individual bonds (unless it's zero coupon), because you don't know what the YTM will be in the future. Most bond valuations assume reinvestment of coupon payments at the YTM. Unless of course you're doing a simple interest calculation for your own bonds and accepting no future return on your coupon payments (or ignoring it).


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## GreatLaker (Mar 23, 2014)

True, if someone wants a specific amount (at least in nominal terms) at a set future date, bonds, strip bonds or GICs make more sense. You can even convert a rolling ladder to a declining ladder so they all mature around the same time. On the other hand, funds are good for an investor that wants flexibility to DCA or buy/sell any amount according to changing needs. A mix of both might be good. Horses for courses.

Some of the hype flying around about fixed income may be due to the structure of the investment industry. What commission based investment sales rep would recommend a low-cost bond ETF when they could sell individual bonds, mutual funds or better yet, so-called "bond substitutes" like preferred shares or high yielding dividend equities, especially on the back of a bull market that shows how "safe" they are.


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## Pluto (Sep 12, 2013)

Well thanks. Upon perusing this lively and informative thread, I'm not so concerned anymore. 

I suppose I'll just muddle along with my bond etf and gradually move it into stocks.


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## new dog (Jun 21, 2016)

GreatLaker said:


> Pento lost me when he said Janet Yellen changed her position on interest rates when Trump got elected.
> 
> This paper from Vanguard is somewhat less apocalyptic and uses data and analysis to demonstrate how bonds react in response to rising rates. It's worth a read.
> Risk of loss: Should the prospect of rising rates push investors from high-quality bonds?


I agree on this part I think the Fed had the same game plan for Hillary as well even if they didn't want Trump elected.


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## james4beach (Nov 15, 2012)

Yes there are some good papers from respectable sources that show some analysis of what has happened with bond funds during past rate tightening cycles. It's really not as bad as some people make it out to be. They've done the math in these:

https://personal.vanguard.com/pdf/s807.pdf
http://www.schwab.com/public/schwab/nn/articles/Can-Bond-Funds-Make-Sense-When-Interest-Rates-Rise

In that Vanguard paper, I also suggest you read the box with title "Mitigating bond risk by moving to cash". It points out that hiding out in cash and short-term bonds (which is very frequently suggested on CMF) is not necessarily a great idea and has pitfalls too. Notably, you have to successfully time your exit from cash and know when to get back into longer maturity bonds.


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## james4beach (Nov 15, 2012)

Argonaut said:


> You also don't know what your return will be on individual bonds (unless it's zero coupon) . . . Most bond valuations assume reinvestment of coupon payments at the YTM.


That's true, but you still know it will be positive. And if interest rates go up in the mean time, your return increases because the coupons get reinvested at higher yields.

By the way I've been arguing the case of holding/accumulating bond funds for _long_ periods. *Time horizon* is everything here! If you are now in retirement and need to draw money out of your bond holdings, you need shorter maturities.

As a rough guide, match the average term with how soon you'll draw money out.
VSB, XSB = 3 years
GICs = 5 years
VAB, XBB = 10 years


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## agent99 (Sep 11, 2013)

> Originally Posted by Argonaut View Post
> You also don't know what your return will be on individual bonds (unless it's zero coupon) . . . Most bond valuations assume reinvestment of coupon payments at the YTM.





james4beach said:


> That's true, but you still know it will be positive. And if interest rates go up in the mean time, your return increases because the coupons get reinvested at higher yields.


In theory, that is right. But individual investor owning individual bonds are not able to re-invest the coupon interest in the same bonds. 

In practice, at least in my case, the interest accumulates for a month or two. Then when there is a sufficient amount to make a minimum investment, I buy something. Generally, I put it in a balanced mutual fund that is partially in fixed income. Then later, I sell the fund units (hopefully at a profit) and use the cash either as part of RRIF withdrawal or to buy something else. Bonds are only held in registered accounts.

But as you said - I know what I paid for the bonds, I know what I will get back at end, and I know what the coupon interest will be along the way regardless of how I reinvest or use it. Result should be positive. Don't own any zero coupon bonds these days.


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## mark0f0 (Oct 1, 2016)

Bond funds delivered returns significantly greater than the yield-to-maturity of the portfolios because duration was held constant. In other words, as bonds went up in value closer to their maturity date (due to the shape of the yield curve), the fund sold those bonds and replaced them with bonds that were further out on the curve. 

This worked fabulously when interest rates were falling, particularly long-term rates. Insurance companies, banks, pension funds, etc., reaped returns significantly in excess of the usual quoted returns on bonds, paying unsustainably extravagant benefits (and executive compensation) on the strength of such. Bond issuers suffered immensely, having sold debt at a high interest rate on the assumption of continued high business returns and inflation, only to have the rug pulled out beneath them. 

At some point, things are going to turn around. Issuers will start to benefit from falling bond prices and rising inflation (buying stock in these issuers, particularly those that hold long-term infrastructure, is a swell idea!). The owners of bonds will suffer losses due to inflation, and due to the fact that keeping duration constant will unwind the previous excess returns.

FIRE all around will be amongst the worst sectors of the economy in which to invest because of this. Rising interest rates are deadly to financials.


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## mordko (Jan 23, 2016)

mark0f0 said:


> Rising interest rates are deadly to financials.


Pardon? Doesn't it depend on a range of things? I would have thought banks would be pretty happy with higher interest rates.


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## mark0f0 (Oct 1, 2016)

mordko said:


> Pardon? Doesn't it depend on a range of things? I would have thought banks would be pretty happy with higher interest rates.


It may seem that way, but not really. Why? Its pretty simple, go calculate their gross margins:

ZIRP:

Gross Margin = investment returns - cost of funds / cost of funds ~= infinity.

(dividing by zero ~= infinite margin, although not achieved in practice because there's no such thing as truly cost-less funds, or free equity to backstop it all!!)

Something > ZIRP:

Gross Margin = investment returns + something - cost of funds + something / cost of funds + something < infinity.

Low rates (approaching ZIRP) are the best thing that ever happened to the banks. A continuation of the 35-year-old trend of falling interest rates. As long as duration mismatch was > 0, the banks enjoyed 35 years of falling funding costs against investment returns which weren't falling nearly as fast.

The opposite, that of higher and rising rates, significantly impairs the banks.

Banks didn't get to be 41% of the contemporary TSX (and 60%+ of the dividends/earnings!), or an overwhelming portion of the US "economy" without a lot of help from very low interest rates, asset inflation, and the enabling of very large gross margins as detailed in the previous calculation.


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## mordko (Jan 23, 2016)

Interesting. So Steve Eisman is going long on banks because rates are up which seems bloody obvious as their spreads are going up. Mark0f0 begs to differ. We shall see.


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## james4beach (Nov 15, 2012)

I think traditional depository banks benefit from lending spreads, but the large commercial banks (Citigroup, JPM, and Canada's Big Five) aren't traditional banks. They're government-backed hedge funds, and they have benefitted tremendously from cheap money at near 0% rates and tremendous bond market stimulus.

I'm eagerly awaiting to see how the big banks handle higher rates and the end of bond stimulus (QE).


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## new dog (Jun 21, 2016)

What about housing collapsing again if rates get too high, plus the ramifications to the economy, I am sure that won't be very good for the banks.


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## mark0f0 (Oct 1, 2016)

mordko said:


> Interesting. So Steve Eisman is going long on banks because rates are up which seems bloody obvious as their spreads are going up. Mark0f0 begs to differ. We shall see.


Even absolute spreads will be pressured significantly in a rising rate environment as the same amount of money will be fiercely competing to lend against collateral of diminished value.

At least Canadian banks, to their credit, are exposed to a wider range of inversely (to the interest rate cycle) correlated activities. So they probably won't fare as badly. But they certainly won't be the 'leaders' of the next phase of the economy. The TSX60 having >41% banks leaves relatively little possible upside relative to the index as >41% is already at the historic upper band.


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## mordko (Jan 23, 2016)

^ percentage of banks in an index has a lot to do with non-financial companies staying private. The reason for that is excessive regulation on public companies. The decline in the number of public companies is very large - and unfortunate, but there is a much higher percentage of old and therefore public companies among banks.

Fierce competition in the Canadian market is also questionable, but we shall see. Housing could be an issue in Canada. As prices in major centres have skyrocketed, there has to be a slowdown at some point.. If I were a betting man, I would say that American banks and TD will do great.


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## james4beach (Nov 15, 2012)

mark0f0 said:


> Bond funds delivered returns significantly greater than the yield-to-maturity of the portfolios because duration was held constant. In other words, as bonds went up in value closer to their maturity date (due to the shape of the yield curve), the fund sold those bonds and replaced them with bonds that were further out on the curve.


I don't expect bond funds to do as well in a rising rate environment, but I believe that "rolling down the yield curve" still happens and is profitable. It works as long as there's a normal yield curve that's sloping upwards. e.g. today a bond with 1 year left yields 0.7%, so a fund would sell this bond and buy the 10 year at 1.8%. This boosts the earnings rate on that money by 110 basis points.

And mark0f0, I agree with your assessment that rising rates are deadly to financials. It's as if people forgot that the 2009+ rebound was based on zero interest rates and QE (whose purpose was to force the whole yield curve lower instead of just the short end).


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## mark0f0 (Oct 1, 2016)

james4beach said:


> I don't expect bond funds to do as well in a rising rate environment, but I believe that "rolling down the yield curve" still happens and is profitable. It works as long as there's a normal yield curve that's sloping upwards. e.g. today a bond with 1 year left yields 0.7%, so a fund would sell this bond and buy the 10 year at 1.8%. This boosts the earnings rate on that money by 110 basis points.


Yeah (getting back on topic here), it depends upon how fast the changes are. A bond fund wouldn't be changing its duration that much in the portfolio. They'd be replacing, for instance, a bond with 1 year left at 0.7%, with one at 2 years at say, a yield of 1.1%. I don't think short-term bond fund owners would be all that pleased with the fund's manager if they suddenly started swapping out short-term paper for 10-year paper to any degree of significance.



> And mark0f0, I agree with your assessment that rising rates are deadly to financials. It's as if people forgot that the 2009+ rebound was based on zero interest rates and QE (whose purpose was to force the whole yield curve lower instead of just the short end).


Yup. The financial sector collapsed in 2008/2009 from rising interest rates on MBS. The Fed reflated by lowering interest rates, which allowed the banks to rapidly recapitalize themselves through earnings. But incredibly, now there's actually financial analysts out there arguing that higher rates 'help' the banks. Oh what a bizarre world we live in! Either "they" are just playing us for patsys, or the analysts truly are kids with no understanding of the 'math' and macroeconomic implications of rising interest rates.

Another way to look at the rising interest rate problem is that higher rates, in extremus, hyperinflation, causes M1 to converge with M3 (M1 = base money, like currency, etc., M3 = total monetary aggregates) as nobody wants to lend in an environment of high inflation. Its this convergence, ie: a reduction/elimination of leverage in the system, against a relatively high set of fixed costs, that kills the financial sector. Besides, with a lender on practically every streetcorner, and people up to their eyeballs in debt (housing debt in Canada, student and car loans in the USA, etc.) -- isn't it obvious that there's overcapacity which must eventually be excised from the system through systemically poor returns to the owners of financial sector firms?


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## mordko (Jan 23, 2016)

Some great insights. In other news:
- Rising profits are bound to cause a stock market collapse.
- Utilities and REITs will do great in a rising rate environment.
- The more tariffs we introduce and the less we trade, the better our economy will do.
- Sun always rises in the west.


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## mordko (Jan 23, 2016)

Back through the looking glass...

- The financial crisis was NOT caused by high interest rates. That's ballooney. It was caused by bad landing, mischaracterization of risks and by taking huge/bad bets. All of this can happen in either high or low rate environment. 

- The banks' shares were saved not by the low interest rates, but by governments baling out bankrupt companies, buying their stock, providing them with liquidity ($600 billion) and guaranteeing their debt. Low interest rates were meant to encourage lending to the rest of the economy.


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## mark0f0 (Oct 1, 2016)

mordko said:


> Back through the looking glass...
> 
> - The financial crisis was NOT caused by high interest rates. That's ballooney. It was caused by bad landing, mischaracterization of risks and by taking huge/bad bets. All of this can happen in either high or low rate environment.


There were actually very few defaults associated with the financial crisis of 2008/2009. The problem, first and foremost, was rising interest rates on actual MBS. Once the market detected lender insolvency due to those higher rates, voila, there was a run (ie: a run is just higher interest rates), and the rest is history. The policy response was to lower interest rates to increase bank profitability to such levels that the banks could fill in the capital hole thus created and eventually regain control over rising MBS rates. MBS were also significantly targeted by the Fed for QE as rates had risen significantly on that debt. 



> - The banks' shares were saved not by the low interest rates, but by governments baling out bankrupt companies, buying their stock, providing them with liquidity ($600 billion) and guaranteeing their debt. Low interest rates were meant to encourage lending to the rest of the economy.


I assume you're referring to TARP here. TARP funds were rapidly repaid as the banks had extreme earnings after their funding costs were driven to near zero. That's how they were able to repay TARP funds so quickly. The low rates absolutely and enormously benefitted the banks, as low interest rates are the best thing to happen to the banks. If we go into a higher rate environment, the banks will suffer. It might not be a rapid collapse this time around, but rather, it could be decades of very low earnings and little to no growth (if not negative growth), punctuated with short-term periods of enthusiasm. 



> Some great insights. In other news:
> - Rising profits are bound to cause a stock market collapse.
> - Utilities and REITs will do great in a rising rate environment.
> - The more tariffs we introduce and the less we trade, the better our economy will do.
> - Sun always rises in the west.


Now, don't be silly. Although certain kinds of utilities, particularly modern de-regulated utilities should actually do well with rising rates. As higher interest rates and the capital intensive nature of the 'utility' business creates a greater 'moat' around their business. The whole idea of utilities performing poorly with rising/higher rates mostly refers to rate-controlled "utilities" where the prices and rate of return on capital are fixed, through fiat, at certain levels. Deregulation in many cases has relaxed such.


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## new dog (Jun 21, 2016)

We are still looking for a inverted yield curve which traditionally forecasts a recession 6 to 12 months later. Hard to say if we will see this again because the Fed would have to raise a lot while long rates drop. We are in uncharted territory because of QE and manipulation, that we don't know what will happen this time around.


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## lonewolf :) (Sep 13, 2016)

Some say the fed crashed the market in 1929 to punish the banks that broke away from the fed. Fed might crash the market well Trump is in. Though the fed can only do so much markets going to do what it is going to do


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## lonewolf :) (Sep 13, 2016)

Rates can soar during the collapse of the system. When JP Morgan had to arrange a gold loan to bail out the government interest rates reached nearly 200% in 1899


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## james4beach (Nov 15, 2012)

I'm posting on this old thread because I think this thread is a great case study in bond volatility!



Pluto said:


> When is this bond rout going to end?
> Is the bond rout implying a coming stock rout?


Pluto posted this 2016-12-21 and the funny thing is that bonds only went higher from there. If you look at the chart you will see that the post actually marked the bottom in bonds; they did not decline any further after he wrote this.

Chart of XBB starting from Pluto's post

XBB returned 4.1% annualized since this post. Now imagine the people who were feeling the pain in bonds at the time due to short term losses. Some gave up on bonds and went to cash. They lost out on that 4.1% CAGR over the next three years.

If we go back in time to when this thread was started, we can look at what induced that feeling of pain. It was actually a pretty minor fluctuation in bond prices; just a 5% drop in XBB's price from a recent peak a few months ago. A normal event that will occur quite frequently.

And yet, _every_ time a drop like that happens, people start commenting about how bond funds are broken, fundamentally flawed, and could fall catastrophically. It's guaranteed... this emotional reaction happens every time.

And if just 5% inspired Pluto's emotional pain, think of what will happen in the bond market when we eventually get a 10% drop. This would be normal volatility, but all hell will break loose. People will freak out and sell (at losses) and talk about how bonds are done.

For me, the takeaway from this is: if you're investing in a standard maturity bond fund like XBB, VAB, ZAG, then make sure you're ready to handle the natural price volatility in bonds. You should not be surprised to see a 5% drop or even a decline like 15% (which has happened in the past).

If you cannot handle a 15% or perhaps 20% temporary loss (volatility) in a bond ETF, then you should invest in GICs or shorter term bond ETFs, something like XSB or XSH which has lower volatility. However also be aware that over the long term, XSB is guaranteed to have a lower return than XBB because the bond market rewards you with returns according to how far out in time you go.


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## lonewolf :) (Sep 13, 2016)

The rating agencies are @ it again giving high ratings. Those issuing the bonds pay the rating agency to rate their bonds. If the rating agency does not give the bonds a good rating the issuer takes their business else where to a rating agency that will give a better rating. In the part of the cycle none of the rating agencies can be trusted.


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## Pluto (Sep 12, 2013)

^^
I ditched the bonds back then. Went entirely into stocks. No gic's or bonds for me anymore. Its not the volatility of xbb, its the taxes on the interest plus little opportunity for capital gains. I prefer lower taxed dividends + capital gains, so no bonds and no gic.


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## OptsyEagle (Nov 29, 2009)

I don't have any bonds for my regular portfolio but do maintain some for part of my cash wedge. My cash wedge starts out with about 3 years of income in cash (HISA) and 10 more years of income divided 50/50 with bonds and stagered GICs. This allows me to maintain the rest of my portfolio in stocks, without the worry about basic income during any turbulent times. I am hoping I will never need them unless we have a bear market that lasts longer then 3 years. 

Other then that, I can't see any benefit of bonds when the 10 yr yield is at 1.55% or something like that. The only benefit they would have is to rise during a crises, like they did on Friday, but you would probably need 2/3rds or more of your portfolio in them, to not lose money, so since that is not going to happen, why bother at all.


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## AltaRed (Jun 8, 2009)

For retirees, it is important to have a secure base of capital reserves to supplement annuity and investment income to continue to fund ones lifestyle if equity markets tank for a prolonged period of several years. There is nothing like HISA, GIC, or maturing bonds to supply that missing wedge of cash flow needs.

The objective is certainty of capital versus a return on that capital.


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## GreatLaker (Mar 23, 2014)

I do something similar to Optsy. My target is to keep ~10 years of fixed income split among GIC ladders and Bonds. I look at it a bit differently though. I don't consider them to be a regular portfolio and a cash wedge. Rather I just see it as a portfolio with x% fixed income and 100-x% equity. Same result though.

I could reduce my FI somewhat. I have enough investment income to cover my annual expenditures, and have not yet even started CPP or OAS. My WR is slightly under 3%. And my VPW spreadsheet says I can withdraw about double my current spending level.

Still early in retirement (2 years) I am feeling my way through my strategy and withdrawal plan. I know others have posted about letting their FI % drop as they get closer to the finish line. I usually think on it a while before making portfolio changes. Kinda like Woody the Beekeeper in Cheers: "No sudden movement".


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## AltaRed (Jun 8, 2009)

The longer one is in retirement, the more confident one might become to reduce conservatism. 13.5 years in, I have increased my spending almost 3 fold given my 13+ years of retirement experience.

Can't repeat enough how important a cash/fixed income wedge really is for a retiree to bridge a period of economic malaise. A+ rated debt is insurance. Those fixated on maximizing investment income will have a brutal realization if we have a 3-5 year deep recession. Dividend income will be cut, perhaps by as much as 30%, non-cumulative preferreds may suspend dividends entirely, and many sub-A rated corporate bonds may fail. Several BBB (and lower) rated corporations will default. The scenario is not at all far fetched.

My fixed income wedge is about 5 years at current rates of spend and investment income, 3 years if I lose 30% of my dividend income stream, and 10 years if I cut back spend considerably. These are simply back of envelope estimates. Spreadsheeting these is nonsensical since the input assumptions are wildly random guesses.

Added: People pooh-pooh dividend cuts from blue chip corporations. This is a naive narrative. The likes of BCE with a high dividend payout ratio will have to cut their dividend if they lose 10-20% of their revenue stream because companies go out of business and drop their Bell service, individuals will cut/reduce their cable, mobility and internet plans when they lose their jobs, etc, etc. 

Even ENB and TRP are not immune when some of their contracted shippers go out of business or cannot pay their bills. Global oil demand can drop 10% in a deep recession. That means lower oil prices and lower oil shipments. Imagine the loss of those tolls for companies with high dividend payout ratios. Those same companies will likely cease to pay dividends on their non-cumulative preferreds. On and on it goes. Most of us have not experienced real deep nor prolonged recessions.


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## OptsyEagle (Nov 29, 2009)

GreatLaker said:


> I don't consider them to be a regular portfolio and a cash wedge. Rather I just see it as a portfolio with x% fixed income and 100-x% equity. Same result though.


Sure. I just find it easier to separate them since, although all are investments, they are for dramatically different purposes. The "portfolio" will be for long term investments. That will be what it is for even if I am 95 years old since I don't really know any other way to invest, other then for the long term. All this worked great when I was a lot younger but I kind of had to make some small adjustments when I retired. I decided to go with the cash wedge, instead of some asset allocation model that may have worked out to the same thing. I think my wedge is maybe a little over 10% of my invested assets. If I used a 90:10 stocks to bonds, asset allocation model, I would probably lose sleep at night worrying about my stock market risk level. With a 100% long term stock portfolio with 13 years of expenses set aside, although the same allocation, it somehow makes me sleep a lot better. Probably because it is based on real numbers and most asset allocations models that are supposed to deal with risk and time horizons are really just an opinion based on not much.

I do have a cell in my spreadsheet that calculates my overall asset allocation but I really don't look at that very much. I look at my "portfolio", which is all stocks, and calculate my rate of return, my single stock allocation amounts, my geographic diversification, currency risk, etc. I don't really look at my cash wedge except to ensure that the total adds up to 13 times my expected cash requirements, and of course I look at the amount of money my household is spending in order to work all that out.


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## james4beach (Nov 15, 2012)

I keep 2 to 3 years living expenses in cash (high interest savings) and everything else is invested in my asset allocation.

Then again, I'm not retired, so I can see how a retiree might want more years in cash as AltaRed has.


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## AltaRed (Jun 8, 2009)

Remember that my definition is the delta between living expenses and my other sources of income, e.g. pensions and investment income, not living expenses on an absolute basis.


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## OptsyEagle (Nov 29, 2009)

AltaRed said:


> Remember that my definition is the delta between living expenses and my other sources of income, e.g. pensions and investment income, not living expenses on an absolute basis.


Mine is as well. What complicates the math and consequently the invested amounts is the fact that although retired, I am not yet eligible for CPP and OAS, but will be within the 13 years I mention above, where I want to set aside cash. So what that means is I need more "income per year" in the next few years then I will need in the later years, once those government programs kick in. Since I am aging, as well, this also becomes a moving average calculation. Add to that a variable expense amount to some degree, that is affected by inflation and it can get a little complicated.

With that in mind, I am just trying to hit approximate numbers, not exact. Since I am lucky that my cash amount is not overly significant to my portfolio size, I will most likely have way more then 13 years cash, when I am 65, since when I put that cash aside, I needed significantly more because of the absence of those gov't income programs. My plan will be to just keep the bonds and GICs where they are, as opposed to reducing them in accordance with my income need, since they are not that much and are what makes a retired investor sleep well, during those ugly, ugly markets.

I will add, that in my case, the low amount of income I need for living expenses, has more to do with my lack of debt, controlled spending, and very low interests in the things many others spend money on, then it is because I am stinking rich.

I have always said, the quickest way to early retirement is a lessened need for doing things and having stuff, then what can ever be achieved by trying to sock away whatever money is left from your paycheque, after all the taxes are paid, and investing it ... and annually or eventually paying taxes on all of that as well. Whereas a $1 saved from spending is a $1 after tax.


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## james4beach (Nov 15, 2012)

AltaRed said:


> Remember that my definition is the delta between living expenses and my other sources of income, e.g. pensions and investment income, not living expenses on an absolute basis.


Thanks I'm glad you reminded me of this. I haven't totally figured out my cash management plan, and my circumstance isn't retirement... I will formulate a better question and post it to the group. Basically I need a cash buffer to smooth things over, but it's not a steady withdrawal. Some years I have net new cash, other years I will spend (have negative cashflow) so it's an erratic cashflow.

I'm not retired, and will be working for the next few decades. My securities holdings and net worth will continue to grow _on average_, but the issue is that I may go a stretch of say 2 years in withdrawal mode.

I'm trying to design my finances to smooth over all of this. It would be pretty stupid for me to add securities one year and then turn around and sell off a bunch the next year during negative cashflow. So I'm currently thinking of a "cash buffer" which can absorb much of the inflow & outflow. And if the cash buffer gets excessively large (e.g. right now), I buy more securities. If the cash buffer gets too small, I sell securities.

Right now I'm trying to deploy cash into my investments, but a bit nervous about not having a cash management plan. On one hand, I don't want to keep too much cash and experience cash drag. But I also don't want to over-invest, and have to turn around next year and liquidate things I just bought.


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## OptsyEagle (Nov 29, 2009)

james4beach said:


> I'm trying to design my finances to smooth over all of this. It would be pretty stupid for me to add securities one year and then turn around and sell off a bunch the next year during negative cashflow. So I'm currently thinking of a "cash buffer" which can absorb much of the inflow & outflow. And if the cash buffer gets excessively large (e.g. right now), I buy more securities. If the cash buffer gets too small, I sell securities.


That's probably what I would do. I use to run my bank account with a "balance after the next upcoming monthy expenses" of maybe $1,000 when I was a working stiff. Everything else got invested for the long term. If I was in your situation, where I thought the expenses the month after that might be more then some lousy income amount I might bring in, I would just increase that amount needed as a remaining balance to an amount that would cover any reasonable income shortfall. That balance does not need to sit in a chequing account earning no interest, but would need to be accessible within a few days and must not fluctuate in value. Obviously a HISA would do it.

Once the balance starts getting above some number you feel comfortable with, invest it for the longer term. 

The only difficult issue with that might be the estimate of the degree or length of time that income shortfall might take place. You would know more about that then I. I would think, however, that the solution would be that the more variable the amount/timing of the income is, the larger the balance would need to be.

Also keep in mind, that these shortfall estimates do not necessarily have to be accounted for with cash. Credit is your friend in the world you seem to be in. A low interest line of credit or even access to the margin credit in your margin account can account for some variation in revenue receipts and expenses. Even credit cards work well for pushing an expense incurred this month into an obligation for next month. Obviously during my working life, the expenses I incurred in a given month did not always equal what I estimated plus $1,000, so access to a line of credit and all that margin in my margin/cash account as well as credit cards for shorter term variances, came in handy at times. It rarely was ever needed but it allowed me to have less money in a short term reserve which freed up more money for longer term investment.


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## lonewolf :) (Sep 13, 2016)

james4beach said:


> I keep 2 to 3 years living expenses in cash (high interest savings) and everything else is invested in my asset allocation.
> 
> Then again, I'm not retired, so I can see how a retiree might want more years in cash as AltaRed has.


 Cash looks good now as no one wants it.

Rydex money market holdings hit an all time low of 0.10% 12 times between Dec 11 & Jan 10th

The extreme of 0.11% lasted 1 day when the DJI was in a bear market 2 months latte the S&P rolled over & dropped 51% into the 2002 lows

Another 0.11% 1 day reading came the day of January 2018 peak

In November 2019 mutual fund cash to asset ratio hit an all time low of 2.8%


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