# Self-sustaining portfolio?



## MarcoE (May 3, 2018)

A portfolio that you could live off -- forever. Is such a thing possible?

Sometimes, when we think about retirement, we think about decumulation. We imagine gradually using up our savings, year by year, until nothing is left. Like eating a big pie, slice by slice, until only crumbs remain. But what about a portfolio that could NEVER run out? That keeps replenishing itself, even as you withdraw money from it, even as inflation eats away at it? A portfolio that lasts FOREVER, no matter how long your retirement? A magical pie that keeps growing new slices, even as you keep eating?

Suppose you want two things from your portfolio:

1) To withdraw $100,000 a year, rising with inflation -- you could retire in style.

2) For the portfolio, after your withdrawals and after taxes, to keep up with inflation.

At this point, the portfolio is self-sustaining. You could live off it FOREVER. Even if you lived to be 1,000 years old. Even if you retire at 30 and live to be a million. You could retire and never run out of money. A bottomless well.

Is such a portfolio possible? If so, how would such a portfolio look? How much money would be in it?


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## james4beach (Nov 15, 2012)

This is similar to the SWR (sustainable withdrawal) scenarios, except you are extending the lifetime to something like 80 years instead of the usual 30. The same concepts apply; you want the portfolio to provide the annual withdrawals without depleting.

If you want to withdraw 100K per year, with inflation adjustment, then according to the Monte Carlo simulator at Portfolio Visualizer, you could start with a $3.4 million portfolio with half in bonds and half in stocks. Apparently, in 94% of simulated scenarios, those 100K annual payments will persist for 75 years. In the other 6% of scenarios, you would deplete your portfolio.

However, those are based on historical performances. Many people point out that with the relatively high stock and bond valuations of today, it would actually take more capital to achieve the same result going forward.


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## AltaRed (Jun 8, 2009)

Or simply have a $3-3.3 million portfolio of Cdn dividend paying stocks (or XIU ETF) with an average yield of 3-3.5% (quite doable). The dividend growth alone will likely keep pace with inflation forever, with just a few hiccups now and then for bear markets. Don't even have to tap into capital.


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## pwm (Jan 19, 2012)

Is it possible? It certainly is for me. Retired 13 years now. In fact, my investment accounts keep growing rather than diminishing. That is the case because I have a DB company pension and I spend less than $100k per year. If I took all the dividends instead of re-investing it would probably be self sustaining indefinitely with a $100k yearly income. This is a portfolio which is 100% stocks, or funds that hold them, all of which are solid dividend payers. Also a factor to consider is whether you are a couple who both get government benefits, OAS & CPP, which we are.


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## GreatLaker (Mar 23, 2014)

This article at the Bogleheads Wiki explains several different withdrawal methods:
https://www.bogleheads.org/wiki/Withdrawal_methods

Finiki has a page on Sustainable Withdrawal: http://www.finiki.org/wiki/Sustainable_withdrawal

There are methods like Constant Percentage and Spend Only the Dividends that cannot run out of money, but they are susceptible to inflation or variable withdrawal amounts that may result in lower withdrawals in bad markets. It's not unusual for portfolio size to increase in the early retirement years then decline later as inflation drives withdrawals up.

Choice of withdrawal method depends on your preferences for things like a stable annual income, inflation protection, and desire to leave a large estate.


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## agent99 (Sep 11, 2013)

pwm said:


> Is it possible? It certainly is for me. Retired 13 years now. In fact, my investment accounts keep growing rather than diminishing.


In our case 15 years. This is for a couple. No significant pensions but about $35k in CPP/OAS. Spending varies depending on home upgrades, trips, car expenses etc. Total portfolio has grown at average rate of 3.6% over 15 years. We could spend more, but don't have the desire or need for more things like expensive trips or cars.

Question would be whether $100k includes CPP/OAS) - a significant amount if included in $100k. Another factor, is how much of portfolio is in RRIFs. Required withdrawals are taxed as income. So, really part of RRIFs belong to GOC!

Without allowing for CPP/OAS, I would think that Alta is close to right. I would say $2.75-$3.5 Million would do it depending on how much is in RRSP/RRIFs and how conservatively the funds are invested. For a couple with $35k in CPP/OAS, $2 million might do it.


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## james4beach (Nov 15, 2012)

AltaRed said:


> Or simply have a $3-3.3 million portfolio of Cdn dividend paying stocks (or XIU ETF) with an average yield of 3-3.5% (quite doable). The dividend growth alone will likely keep pace with inflation forever, with just a few hiccups now and then for bear markets. Don't even have to tap into capital.


I agree, with enough millions you could just put it in XIU and live forever off the dividends. With the dividend tax credit, this could also be extremely efficient.

There is a notable difference using dividends however. If you put the $3.3 million into a dividend portfolio/XIU/CDZ, there may be times when the dividends decline. The simulation that said $3.3 million generates 100K is using constant payouts that never decline. It's seemingly a small difference, but providing "constant payouts" is quite a serious burden on a portfolio.

This is one reason that dividend-based investing can actually be so sustainable, precisely because they are not constant. Any withdrawal scheme that has some flexibility and variability will generally be more sustainable than constant withdrawals.

The 100K could be achieved with about $2.9 million in CDZ. Just beware that dividends may drop, at times, even though they will trend upward (and keep up with inflation) in the long term.


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## jargey3000 (Jan 25, 2011)

pwm & agent99 - i'd be interested in seeing some of the major holdings you each have, if you'd care to share a bit.
I can probably guess some of them....but I'm curious to see what you're currently holding...


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## AltaRed (Jun 8, 2009)

james4beach said:


> There is a notable difference using dividends however. If you put the $3.3 million into a dividend portfolio/XIU/CDZ, there may be times when the dividends decline. The simulation that said $3.3 million generates 100K is using constant payouts that never decline. It's seemingly a small difference, but providing "constant payouts" is quite a serious burden on a portfolio.


I didn't take the OP 100% literally. Nothing guarantees $100k indexed for inflation each and every year forever. Even GIC rates could vary over time all over the map. I simply took it as $100k indexed for inflation 'the vast majority of the time'. The other times, one could tap into a bit of capital OR simply cut back spending a bit to cover the leaner years.


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## james4beach (Nov 15, 2012)

AltaRed said:


> I didn't take the OP 100% literally. Nothing guarantees $100k indexed for inflation each and every year forever. Even GIC rates could vary over time all over the map. I simply took it as $100k indexed for inflation 'the vast majority of the time'. *The other times, one could tap into a bit of capital* OR simply cut back spending a bit to cover the leaner years.


You're always dipping into capital, the whole time. Any dividend you don't reinvest back into equity is an extraction of capital. The moment you turn off DRIPs, you're tapping into capital.

I will offer the thought (a philosophical one) that in stocks, there is no clear line that differentiates between capital preservation and dividend income. The two are invariably conflated, despite the terminology. So really the core question becomes what pattern of cash withdrawals you want to achieve... constant? Variable?

The actual mechanism to achieve that, dividends and/or selling shares, makes no difference in the end result. Both are just mechanisms to turn equity into cash, so one shouldn't get caught up on the mechanism.


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## My Own Advisor (Sep 24, 2012)

Like other commenters, I believe about $3 M would easily pay out $100k for life if not more as capital gains kick in over time. You could live off dividends around 3-3.5% and let capital gains do the rest of the work for likely generations to come.


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## My Own Advisor (Sep 24, 2012)

jargey3000 said:


> pwm & agent99 - i'd be interested in seeing some of the major holdings you each have, if you'd care to share a bit.
> I can probably guess some of them....but I'm curious to see what you're currently holding...


I would guess the top-20 or so holdings of XIU, with some departures based on personal preferences; a few U.S. stocks and/or U.S.-listed ETFs. 

These guys know how to invest. pwm was kind enough to be interviewed on my site some time ago. A wealth of great information here; great perspectives any 20-40 something to take to heart IMO. If AltaRed would let me, I would interview him as well!

https://www.myownadvisor.ca/retirement-worries-not-here-find-out-why/

GreatLaker and other CMF members are gold as well. I've learned a ton from them.


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## AltaRed (Jun 8, 2009)

james4beach said:


> You're always dipping into capital, the whole time. Any dividend you don't reinvest back into equity is an extraction of capital. The moment you turn off DRIPs, you're tapping into capital.


James, you are correct, but you knew what was meant by my use of the term 'capital'. Of course, it is all capital (cash is a capital asset). Let's change that to "one could tap into their share holdings....". You okay with that?


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## MarcoE (May 3, 2018)

Thank you for your thoughts, everyone!

What is the advantage of using XIU as opposed to XIC?


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## hboy54 (Sep 16, 2016)

AltaRed said:


> James, you are correct, but you knew what was meant by my use of the term 'capital'. Of course, it is all capital (cash is a capital asset). Let's change that to "one could tap into their share holdings....". You okay with that?


If any extraction of cash from anything is removing capital, then the term ceases to have any utility. Most of us see capital as distinct from the periodic cash thrown off, whether by means of a coupon on a bond, a dividend on a stock, or net rental on a house.

hboy54


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## pwm (Jan 19, 2012)

I don't mind sharing. Here's my top 15 from a Quicken report in descending order. The security names are what I chose when I entered them in Quicken. The symbols don't show in this report, so you will have to decipher that. It's a mixed bag of common, preferred, mutual funds & ETFs, domestic & foreign.

GW Lifeco
PH&N Div income - D
BCE
Dynamic Dividend Advantage
PWR CRP 5% 1st PFD
Ishares S&P TSX Dividend income
Vanguard FTSE CDN High Div Yield Index ETF
Vanguard MSCI EAFE ETF
Ishares REIT index ETF
TD US Index e-series
TD International Index e-series
Powershares CDN Div Index ETF
TD Cdn Index fund e-series
Power Financial 5.9% 1st PFD Series F
Vanguard S&P 500 Index ETF


Note: Also have HISA at EQ bank which was not in this list because it's cash and not considered a security in Quicken. If considered a security it would be halfway down the list.


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## jargey3000 (Jan 25, 2011)

thanks...i wouldnt have guessed a lot of them...


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## jargey3000 (Jan 25, 2011)

getting back to the first number of posts... what do people think of dumpimg the whole $3m -or whatever- into VCNS..and be done with it?


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## agent99 (Sep 11, 2013)

jargey3000 said:


> pwm & agent99 - i'd be interested in seeing some of the major holdings you each have, if you'd care to share a bit.
> I can probably guess some of them....but I'm curious to see what you're currently holding...


The taxable/registered ratio is important from tax point of view. We have 55% in RRIFs, 7.5% in TFSAs and rest in taxable accounts. 

Fixed income is all in RRIFS and amounts to 55-60% of RRIF accounts. It is in corporate Canadian bonds and convertible debentures. It has been difficult recently, but I try to get yield close to what our withdrawal rate is and at least 1-2% more than the inflation rate. We also use pfds in all accounts and I consider that as FI. Mainly splits like PVS, PIC and DGS. Also have a couple of perpetuals. Pfds help boost FI yield. No GICs at present, but will look at them when yield gets back above about 3.5%.

Stocks in Taxable and TFSA accounts include all 5 major banks, Telecoms (BCE/T/RCI), EIF, IPL, TRP, RUS, VET, EMA, AQN, CU, REI, L, MX, PPL, FTS. Plus minor amounts of speculative junk!

Only foreign holdings are in my RRIF and are RDS,UL & BT. 

I avoid ETFs. Many, including popular ones like XIU, XIC include holdings that will just drag down your yield. 

We at one time used the TD monthly Income fund to collect distributions in our RRIFS (No longer available for registered accounts), I believe) - despite the MER, it did very well. It, and some other monthly income funds are balanced funds (include fixed income) but some are better than others. I seem to recall that the TD fund sometimes performed better than our overall portfolio!

This is now. In time, I may move to simplified portfolio that will perform on autopilot whether I am here or not. Not sure what that will look like.


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## jargey3000 (Jan 25, 2011)

tks 99


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## AltaRed (Jun 8, 2009)

hboy54 said:


> If any extraction of cash from anything is removing capital, then the term ceases to have any utility. Most of us see capital as distinct from the periodic cash thrown off, whether by means of a coupon on a bond, a dividend on a stock, or net rental on a house.
> 
> hboy54


Cash is capital. Asset allocation models typically have equities/fixed income/cash as 3 distinct legs of an asset model. It simply is convenient for investors to consider cash as 'fluidity' which of course it is the most fluid asset one can have, and capital as what is invested in 'physical things' that can be appreciated or depreciated, amortized, etc. We've already spent too much time spending bytes to have this discussion. I am agnostic on this kind of thing.


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## humble_pie (Jun 7, 2009)

how could anyone talk about a portfolio that would last for 1000 years
or 80 years
even 30 years is too much of a stretch

i have one of those geese that keeps laying her golden eggs
i hope & try to plan it forward for 20-30 years

but i monitor & work it at least once a week

words like nortel enron bombardier air canada & gandalf resonate w me


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## jargey3000 (Jan 25, 2011)

humble_pie said:


> how could anyone talk about a portfolio that would last for 1000 years
> or 80 years
> even 30 years is too much of a stretch
> 
> ...


also, the 3 "b"s.......bre-x, blackberry


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## AltaRed (Jun 8, 2009)

humble_pie said:


> how could anyone talk about a portfolio that would last for 1000 years
> or 80 years
> even 30 years is too much of a stretch


I took it as a rhetorical question/idea. Portfolios based on individual stocks have to be reviewed at least annually to identify potential black swans. Remember even TRP wavered in 1999 or so. 

A set and forget portfolio would more likely be Couch Potato broad based indices, which is exactly what my ex-Canada is. Doesn't much matter what happens with any 1-2-10 stocks within it, even an 'out of favour' sector.


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## TomB19 (Sep 24, 2015)

humble_pie said:


> how could anyone talk about a portfolio that would last for 1000 years
> or 80 years
> even 30 years is too much of a stretch


I have a egg that I need to stay in the nest for 35+ years. I'm counting on it lasting and I'm confident it will, or I wouldn't have ended my career, but we will see.


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## humble_pie (Jun 7, 2009)

TomB19 said:


> I have a egg that I need to stay in the nest for 35+ years



since we are into the metaphors, wouldn't that be a goose that you have in the nest
you know, the bird that will keep laying those golden eggs which an independently well-off party needs for sustenance every so often


.


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## james4beach (Nov 15, 2012)

humble_pie said:


> how could anyone talk about a portfolio that would last for 1000 years...words like nortel enron bombardier air canada & gandalf resonate w me


I agree that individual stock portfolios have to be reviewed regularly and maintained. But index portfolios are amazingly hands-off.

At one time, XIU held large amounts of both Nortel and Bombardier. Indeed the stocks were wiped out, but the TSX 60 index (and therefore XIU) was re-factored and kept on going, through *no effort* of the individual investor. That's obviously worth the 0.17% annual fee. The 7% annual return since inception twenty years ago _includes_ some of its holdings getting completely wiped out.

Similarly, SPY has been around for something like 25 years and produced 9% annual return since inception, despite many of its big holdings (GE, Citigroup, etc) getting wiped out.

Alternately an investor can hold a portfolio of individual stocks and do the same pruning and re-factoring. However this must be skilfully done. An individual stock portfolio cannot simply be left alone and forgotten. Index funds do not leave their holdings alone; they are constantly adjusting.


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## TomB19 (Sep 24, 2015)

humble_pie said:


> since we are into the metaphors, wouldn't that be a goose that you have in the nest
> you know, the bird that will keep laying those golden eggs which an independently well-off party needs for sustenance every so often.


I see what you mean. Golden egg laying goose trumps nest egg.

Perhaps I should try to hustle up another contract. lol!


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## AltaRed (Jun 8, 2009)

My Own Advisor said:


> pwm was kind enough to be interviewed on my site some time ago. A wealth of great information here; great perspectives any 20-40 something to take to heart IMO. If AltaRed would let me, I would interview him as well!


A good interview and hats off to Pwm for sharing. I am too private to share like that. While there are many similarities in the progression such as paying off mortgage as soon as possible, and avoiding both consumer debt and fees, I was late to the DIY game, and my latter 20 years was a lot more disruptive/volatile with ex-pat assignments prohibiting portfolio management, a divorce post-retirement, etc. Stick handled through it by maintaining discipline, avoiding speculative adventures, and paying attention to details.


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## humble_pie (Jun 7, 2009)

james4beach said:


> I agree that individual stock portfolios have to be reviewed regularly and maintained. But index portfolios are amazingly hands-off.




jas4 we've had this conversation before. HaroldCrump too, although he's gone now (ultra-demanding career) so i'm alone here with the heresy.

it's a story whose time has not yet come. Harold used to say that it would not be widely known until a major global bank that was also a big dealer in synthetic index products should fail. I believe that HC was correct.

me i'm sticking to the knitting. ETFs are derivative bank products designed & built for the masses, marketed by an extraordinary slick armada of marketing campaigns conducted by former mutual fund professionals - philip armstrong who came from altamira & founded horizons betaPro canada is an example - who saw the mutual fund writing on the wall 20 years ago, switched to ETFs in order to sell low-cost lines of "guaranteed" & "fool-proof" index investment products to nervous retail investors.

one merely has to read ETF prospectuses. The full prospectuses, not the marketing literatures. They all state clearly that the ETFs carry on representational sampling. That is, they hold stocks expected to give the return of a particular index, not necessarily the actual stocks that compose the index itself.

they all lend "stocks" to unsecured hedge funds in return for fees that help them lower official MERs, because they all know that ultra-low MERs are what retail investors are slavering for. The stocks they lend are not necessarily the index stocks they claim they are holding in the sales literature. Vanguard, for example, likes to say that it is expert at lending out exotic stocks that command loan fees of 5%, as opposed to ordinary stocks that command fees of only 2%. Yet nowhere does any audited vanguard statement reveal in which ETF these exotic speculative stocks are being held. Or, rather, from which ETF these exotics have been loaned out for the high 5% fee.

all ETF prospectuses state that they hold options, futures, swap contracts & other derivatives, including the custom-built specialty index derivatives that John Bogle himself has recently been complaining about.

all of the above is transparently visible to any knowledgeable investigator who cares to look. 


.


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## james4beach (Nov 15, 2012)

It's true humble, there are all kinds of games being played in the ETF world, but they are not all junk. There's a reason I keep talking about XIU ... it is one of the "purest" you will find. It has minimal securities lending, whereas others have much more. XIC (with its 300 underlying) for example has more securities lending. And it is likely that XIU holds all of the 60 constituent securities, because in fact these are the biggest and most liquid stocks in Canada, and 60 is a number that's feasible to hold. So if ever there is a hope of a good quality index ETF, it's XIU.

The financial motive for securities lending doesn't even exist with XIU, because the stocks it holds are so common and liquid that they are plentiful in the market. Nobody is paying the borrowing fee to borrow these kinds of stocks. Besides, securities lending is disclosed in the audited financial statements. The docs show that XIU has minimal lending.

I share your concerns but mainly about other types of ETFs, such as the ones that claim to hold thousands of global and emerging market stocks (as if that's even possible) or extremely broad US and world funds which definitely use sampling, things like VTI (3,629 holdings) and VT (8,099 holdings). Those funds also do much more securities lending, because they hold oddball and rare stocks that are difficult to find, so hedge funds will pay to borrow them.

There is one popular treasury bond ETF in the US that I saw had loaned out fully 1/3 of its entire portfolio to hedge funds. That kind of thing is horrendous. And then we have the wrappers of ETFs, things like XTR, VBAL, VGRO, which add more layers and obfuscation. IMO they are actively managed funds masquerading as passive indexing, departures from the basic pure ETF idea and I don't recommend them either.


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## TomB19 (Sep 24, 2015)

Am I the only one who thinks it's odd that XSB has very steadily been losing value for the last 5 years? It appears to be on a race to $0. Interest rates haven't been increasing for the last 5 years, and yet the decline is clear. XSQ distributes well under the blended value of it's cited holdings and also loses value. There is a larger loss than is accounted for with the MER.

https://ca.finance.yahoo.com/chart/XSQ.TO

Somehow, everybody equates bonds and bond ETFs as the same when they are clearly not.




humble_pie said:


> me i'm sticking to the knitting. ETFs are derivative bank products designed & built for the masses...[snip]


This is brutally cynical but anything designed for the mass market is going to have a few thumbs on the pay-out scale.


To return to the original topic, in order to stand the test of time, the strategy is going to need to be simple and low risk in order to be effective. I'd avoid ETFs, growth stocks, etc. I think it could be done with buying good businesses at reasonable value. Definitely stay away from any "product" or manager.


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## james4beach (Nov 15, 2012)

I don't see anything wrong with XSB. Yes the unit price keeps dropping lower, but the performance of any bond fund is made up of the their cash distributions + share price. You can verify through iShares, Morningstar, Stockcharts, or even by doing your own calculations that XSB has produced a positive return over several years. Google/Yahoo finance should never be used for looking at ETF or even stock performance, as they don't include the effect of distributions.

To illustrate this effect, look at XSB on Stockcharts (link). If you change the ticker to _XSB.TO with an underscore, you will see the raw unit price. Yes, it declines. Remove the underscore and you will see cash distributions included. _Huge difference._ Forgetting the cash distributions, you'd think there was a -6% loss. In fact there is a +6.5% again overall.

The same is true for looking at stock performance, if a stock pays significant dividends. You absolutely have to look at total returns, including dividends. Using that Stockcharts link above, if you enter ENB.TO you will see the 5 year cumulative return of Enbridge is +2%. If you add the underscore and only look at share price, you'll think you're down -16% ... and might think you've lost a ton of money over 5 years. In fact, you've made money.


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## humble_pie (Jun 7, 2009)

TomB19 said:


> This is brutally cynical but anything designed for the mass market is going to have a few thumbs on the pay-out scale.



it's neither brutal nor cynical. Anyone with options experience understands perfectly how to construct a synthetic portfolio.

remember atrp"doc"biz? doc had an options thread here for a while. He was aiming for a 12% annual return. Entirely doable. Doc was a brilliant option trader.

expand doc's personal account to an institutional scale & doc could launch an ETF that would provide some version of the TSX 60 return or the TSX 300 return. All he'd need would be a bank willing to cover the ETF's distribution obligations at times when the synthetic program might come up short.

nor is the issue a matter of "a few thumbs."

it is, in fact, a major scandal still simmering far beneath the surface. I'm not one who minds the synthetic products being sold. After all, when we deposit funds in a bank account, we happily accept the fact that the bank is not going to keep physical loonies piled up in a vault on the branch premises. 

what i do mind is the continued insistence that ETFs are "trading" all the millions of stocks in their portfolios daily, both to rebalance according to the index & also to face the ongoing demands of their authorized participants for purchase & redemption of units.



.


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## TomB19 (Sep 24, 2015)

james4beach said:


> I don't see anything wrong with XSB. Yes the unit price keeps dropping lower, but the performance of any bond fund is made up of the their cash distributions + share price. You can verify through iShares, Morningstar, Stockcharts, or even by doing your own calculations that XSB has produced a positive return over several years. Google/Yahoo finance should never be used for looking at ETF or even stock performance, as they don't include the effect of distributions.
> 
> To illustrate this effect, look at XSB on Stockcharts (link). If you change the ticker to _XSB.TO with an underscore, you will see the raw unit price. Yes, it declines. Remove the underscore and you will see cash distributions included. _Huge difference._ Forgetting the cash distributions, you'd think there was a -6% loss. In fact there is a +6.5% again overall.


XSB is quoted as yielding 2.39%. Using a future value calculator, it should produce 13% over 5 years.

You've just indicated it yielded 6.5% in the last 5 years. That's half.

Was XSB yielding that much less over the last 5 years than it does now? No. It was actually yielding more 5 years ago than it is now, so the discrepancy is even larger than I've indicated.

It's not supposed to be particularly competitive, like a stock with small volume, as the market maker will always sell shares. The market maker is supposed to buy shares, also.

Where did the money go? The MER doesn't account for it, as the yield is already after the MER and the fund cites holdings with blended yield over 2.39%.

Please cast some light. Really. I haven't owned an ETF in a few years because I realized there is a leak somewhere that I can't explain.


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## TomB19 (Sep 24, 2015)

I will say this. If I was to return to a couch potato portfolio, I would hold actual bonds, not a bond ETF.


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## james4beach (Nov 15, 2012)

TomB19 said:


> I will say this. If I was to return to a couch potato portfolio, I would hold actual bonds, not a bond ETF.


To avoid going off topic, I moved my responses to the XSB performance into
http://www.canadianmoneyforum.com/showthread.php/17736-Best-Short-Term-Bond-ETF/page2

If you hold individual bonds, you're probably going to have a hard time replicating the performance of a bond fund. You will have to continually buy more bonds to maintain a constant average maturity. That's what a bond fund does for you. When you don't do this, your portfolio's average maturity declines as you hold the bonds, and the performance drops.

A couch potato strategy pretty much requires that you hold a bond fund (ETF or index mutual fund).


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## agent99 (Sep 11, 2013)

james4beach said:


> If you hold individual bonds, you're probably going to have a hard time replicating the performance of a bond fund. You will have to continually buy more bonds to maintain a constant average maturity.


That's called a bond ladder. Much like a GIC ladder. 

I found over the years, that one good way to lose money was to buy bond funds.

Some light (US based) bond fund reading:

https://www.investopedia.com/articles/mutualfund/05/062805.asp


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## TomB19 (Sep 24, 2015)

james4beach said:


> If you hold individual bonds, you're probably going to have a hard time replicating the performance of a bond fund.


True. I will have to buy CSBs, or something terrible to get performance that low.


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## like_to_retire (Oct 9, 2016)

agent99 said:


> That's called a bond ladder. Much like a GIC ladder.
> 
> I found over the years, that one good way to lose money was to buy bond funds.


Yeah, I've never liked bond funds that much. I feel like it's paying someone to do something that I can easily do myself.

I don't personally hold any bond funds, I prefer real bonds or GIC's, but I can think of quite a few advantages of bond funds.

1. 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.

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

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

4. 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.

5. Low price of admission for the small investor. Real bonds aren't really worth buying under $20K.

I can think of just as many advantages for real bonds.....each has their place for the right person.

ltr


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## humble_pie (Jun 7, 2009)

what is the advantage of holding either bonds or bond funds during a near-inverted yield curve like we've been having though


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## like_to_retire (Oct 9, 2016)

humble_pie said:


> what is the advantage of holding either bonds or bond funds during a near-inverted yield curve like we've been having though


All the standard stuff you associate with bonds. 

Stability in a portfolio, consistent income, capital preservation, diversification from equities, etc.

They're not about making money.

ltr


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## AltaRed (Jun 8, 2009)

like_to_retire said:


> All the standard stuff you associate with bonds.
> 
> Stability in a portfolio, consistent income, capital preservation, diversification from equities, etc.
> 
> ...


+1 except they do make (some) money in the long term. We are used to the 30 year bond bull market where returns were disproportionate to the asset class. 

XSB pricing is doing what it should be doing. Distributions kept falling as the older bonds with higher yields rolled out of the portfolio until about now when they have steadied and are about to turn back up. About halfway through its ~2.5 year duration period (bond yield lows were about a year ago and turned up in 2017). As bond yields started to increase, pricing had to fall off to compensate for yields not yet available from XSB itself (the lag). Within the next year, we will see both higher distributions and higher market pricing from XSB, just like we should. One exception will be if bond yields keep on increasing, XSB pricing will continue to lag in the $27 and change range. In about 2.5 years, it will be in 'full' stride.


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## james4beach (Nov 15, 2012)

humble_pie said:


> what is the advantage of holding either bonds or bond funds during a near-inverted yield curve like we've been having though


See below...



like_to_retire said:


> All the standard stuff you associate with bonds.
> 
> Stability in a portfolio, consistent income, capital preservation, diversification from equities, etc.


Right.

I've used GIC ladders for a long time. The 5 year GIC ladder technique is an excellent fixed income approach and I think is a perfectly fine way to get your fixed income. However, there are actually some advantages of bond funds vs GICs.

Bond funds are liquid, so that's a huge advantage vs locking money into GICs. They also have low/inverse correlations with stocks. When stocks are down sharply, bonds tend to go up, and vice versa. This relationship leads to better risk/return characteristics.

I ran some calculations on this using two 50/50 portfolios, one which uses GICs (no volatility) and the other with XBB (volatile annual returns). The long term performance is about the same, but the portfolio with XBB is less volatile. Both in the 2000 and 2008 crashes, the portfolio with XBB had +1% better performance, due to bonds responding as a flight to safety. *This means that a portfolio using bond funds has fared better in bear market years than a portfolio using GICs or cash for fixed income*.

If you're not impressed by a boost in performance during bad years in stocks, and don't need the liquidity of bond funds, then I think you'd be just fine with a GIC ladder for your fixed income. It will perform just as well; you'll just be missing out on some volatility-dampening effects.


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## MarcoE (May 3, 2018)

I currently have about 60% of my fixed income in bond ETFs, 40% in GICs. Each method had advantages and disadvantages.

My GICs pay a bit more interest. And they won't decline in value if interest rates rise (though this is an illusion, since if you could sell them on the market, they'd be worth less, just like bonds).

My bond ETFs pay a tad less interest. But they pay me monthly income, and will continue doing so forever, and the DRIPs go into buying more units. I like that this is very hands off and can just keep running automatically forever. I can also turn off DRIP if business is slow (I'm self-employed), and I need some fixed income to tide me over. Also, the funds will begin to generate higher income as interest rates rise, and as the higher-interest bonds begin to replace the older bonds. I also like that my bond ETFs are very liquid. If there's a bear market and I want to rebalance, the bond funds can be sold and converted into equity.

Most of my bond allocation is in short term bonds. But next year, I want to begin putting more money into XBB.


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## agent99 (Sep 11, 2013)

like_to_retire said:


> Yeah, I've never liked bond funds that much. I feel like it's paying someone to do something that I can easily do myself.
> 
> I don't personally hold any bond funds, I prefer real bonds or GIC's, but I can think of quite a few advantages of bond funds.
> 
> ...


These things can be argued, but it does come down to what we individually want. 
As stated, I have no etfs or bond funds and no desire to buy them (again!)
At times, I had a GIC ladder, but last GIC I bought was back when 5yr GICs were in the 4-5% range. 
I once had a GIC that paid about 15% and several that were in the double digits and 5-6% above the CPI rate. 
Hard to see buying GICs when their yield is barely above the CPI rate. 

Our corporate bond ladder worked OK until fairly recently, with yields in the 3.5-5.5 range. But those bonds are becoming hard to replace when they mature. This led to learning about and buying convertible debentures that yield in 5+% range. As well as pseudo fixed income in split preferreds. 

Always looking to maintain fixed income yield well above the CPI and approx equal to our draw rate. 

For those who are happy with bond etfs and funds as well as low yield GICs, I have no problem with that. It is your money. But you could do a lot better without adding much risk.

For those interested, here are some historical GIC rates: https://www.ratehub.ca/blog/the-history-of-gic-rates/ Note the real returns vs current day real returns.


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## lonewolf :) (Sep 13, 2016)

agent99 said:


> For those interested, here are some historical GIC rates: https://www.ratehub.ca/blog/the-history-of-gic-rates/ Note the real returns vs current day real returns.



I caution anyone that uses Ratehub, globe & mail or similiar to find the highest interest on GICs i.e., I recently googled list of Ontario credit unions checked the rates individually a few weeks back purchased redeemable 5 yr GICs with 4% interest. For about 20 minutes work the pay will be over 5 years about $5500 more then if I just blindly accepted ratehub & or the globe & mail listing the highest rate. Even after the cost of 4 day holiday I took to go sign the papers I still come out ahead by about 5500


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## like_to_retire (Oct 9, 2016)

agent99 said:


> Our corporate bond ladder worked OK until fairly recently, with yields in the 3.5-5.5 range. But those bonds are becoming hard to replace when they mature. This led to learning about and buying convertible debentures that yield in 5+% range. As well as pseudo fixed income in split preferreds.
> 
> Always looking to maintain fixed income yield well above the CPI and approx equal to our draw rate.
> 
> For those who are happy with bond etfs and funds as well as low yield GICs, I have no problem with that. It is your money. But you could do a lot better without adding much risk.


I think we'll have to agree to disagree that owning convertible debentures isn't adding much risk. They're as close to equity as you can get to risk. It's sketchy to include them in your fixed income allocation just as it would be to do so for junk bonds. Yeah, I'm sure you pick the best rated companies, but a debenture isn't secured like a bond. It's only secured by the issuer's promise to pay it back. There's no physical assets like a bond's security and associated credit rating. There's a reason (as you well know) why they pay such wonderful yields.

For me, when I get close to that risk, I'll buy the equity instead with the hope of greater overall returns and then stick to my fixed income knitting with GIC's and highly rated bonds. Keeping _"fixed income yield well above the CPI"_ is not conducive with protecting your capital. Isn't that the number one mission of fixed income allocation? Convertible debs need not apply...

ltr


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## TomB19 (Sep 24, 2015)

I have wondered how secured bonds would fare against unsecured bonds if a company issued both and was liquidated before either issue came to maturity.

Is there any history on this?


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## Eclectic12 (Oct 20, 2010)

MarcoE said:


> ... What is the advantage of using XIU as opposed to XIC?


Not much that I can see ... both have similar start dates (Sept 1999 versus Feb 2001), both on performance charts have done similarly and the distribution yield is almost identical.
The differences are that XIU is fewer companies with no cap on the % where it's MER is closing in on triple that of XIC.

Volume might be another place of a difference.




james4beach said:


> ... At one time, XIU held large amounts of both Nortel and Bombardier. Indeed the stocks were wiped out, but the TSX 60 index (and therefore XIU) was re-factored and kept on going, through *no effort* of the individual investor. That's obviously worth the 0.17% annual fee ...


When do I get my refund as the annual fee was much higher than 0.17% for the Nortel wind up where I'd have to check for Bombardier. :biggrin:
Going forward, yes it would be about 0.17% or so ... until it changes.


Otherwise, good points.


Cheers


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## CPA Candidate (Dec 15, 2013)

My father died earlier this year and his portfolio continued to grow despite withdrawals of dividends and installments from his RIF. The big reason this was possible was a portfolio that was 90%+ equities. If you want to sustain a portfolio while using some of it, it must grow. The the terrible thing that most retirees do is insist on low volatility through balanced portfolios. Those bonds don't grow and are taxed a higher rate than dividends.

The irony of low risk investing approaches in the short term is that they actually increase the risk you'll run out of money in the long term. Buffet has spoken to this and people should listen. Real risk is not properly understood by the majority of people, it is not stock market volatility.


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## TomB19 (Sep 24, 2015)

CPA Candidate said:


> The irony of low risk investing approaches in the short term is that they actually increase the risk you'll run out of money in the long term. Buffet has spoken to this and people should listen.


This is easier said than done.

For me, it took a few years of equities leaving bonds in the rear view mirror to realize that bonds were a huge black hole in my portfolio. Also, it was easier to take risks with equities, once I was so far ahead that I could absorb a 30~50% market shrink and still be ahead of the game.

That was a long time ago. I've considered where I would be right now if I had put everything into equities and just let it ride. Yeah, bonds weren't the best idea.

We still carry a couple of private mortgages which are FI and I'm happy to do so but I wouldn't do it again. Fortunately, it's now a small component of our portfolio.


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## pwm (Jan 19, 2012)

CPA Candidate said:


> My father died earlier this year and his portfolio continued to grow despite withdrawals of dividends and installments from his RIF. The big reason this was possible was a portfolio that was 90%+ equities. If you want to sustain a portfolio while using some of it, it must grow. The the terrible thing that most retirees do is insist on low volatility through balanced portfolios. Those bonds don't grow and are taxed a higher rate than dividends.
> 
> The irony of low risk investing approaches in the short term is that they actually increase the risk you'll run out of money in the long term. Buffet has spoken to this and people should listen. Real risk is not properly understood by the majority of people, it is not stock market volatility.


You are absolutely correct CPA. Those are my exact thoughts. I've said it many times "volatility is not risk". Retired 13 years, and I'm 100% equities, and would never consider GICs or bonds. My investment income has grown every year since I quit working. I do have 12% in perpetual preferred shares which I consider the closest thing to fixed income in my portfolio.


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## Pluto (Sep 12, 2013)

CPA Candidate said:


> My father died earlier this year and his portfolio continued to grow despite withdrawals of dividends and installments from his RIF. The big reason this was possible was a portfolio that was 90%+ equities. If you want to sustain a portfolio while using some of it, it must grow. The the terrible thing that most retirees do is insist on low volatility through balanced portfolios. Those bonds don't grow and are taxed a higher rate than dividends.
> 
> The irony of low risk investing approaches in the short term is that they actually increase the risk you'll run out of money in the long term. Buffet has spoken to this and people should listen. Real risk is not properly understood by the majority of people, it is not stock market volatility.


Wise words. Agree 100%. Risk is in the degree of quality of the company, not market volatility. Lower quailty, higher risk. 
Falling markets used to scare the heck out of me, now they are opportunities to buy growing businesses at low prices. No more bonds or bond etf's for me, especially since the bond bull is over.


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## AltaRed (Jun 8, 2009)

pwm said:


> You are absolutely correct CPA. Those are my exact thoughts. I've said it many times "volatility is not risk". Retired 13 years, and I'm 100% equities, and would never consider GICs or bonds. My investment income has grown every year since I quit working. I do have 12% in perpetual preferred shares which I consider the closest thing to fixed income in my portfolio.


It's been a 12 year process post-retirement to slowly reduce my bond/GIC/debenture/HISA percentages from ~30% to what is now a grand total of 10%, not including 5% in prefs, but including the bond component in MAW104 that is the bulk of my TFSA. That 10% will likely remain fairly steady to marginally decrease over time as I tap into my RRSP when RRIF'd (all fixed income) but the bond component of MAW104 will increase as I make annual TFSA contributions.

Added: I am guessing both Pwm and I can do that since our portfolios are of the size to manage within the volatility in both share prices and investment income streams during a bear. Not everyone has the luxury of that flexibility. IOW, it depends.


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## agent99 (Sep 11, 2013)

like_to_retire said:


> I think we'll have to agree to disagree that owning convertible debentures isn't adding much risk. They're as close to equity as you can get to risk. It's sketchy to include them in your fixed income allocation just as it would be to do so for junk bonds. Yeah, I'm sure you pick the best rated companies, but a debenture isn't secured like a bond. It's only secured by the issuer's promise to pay it back. There's no physical assets like a bond's security and associated credit rating. There's a reason (as you well know) why they pay such wonderful yields.


I would not include a high % of CDs in my fixed income. However, they are usually of very short term (say 3 or 4 years), yield 5 or 6% int and have potential for capital gains if the underlying stock does well. Probably no more risky that same company's corporate bonds or stock. I use them along with pfds to boost FI allocation yield a bit. True they are not really risk free fixed income, but other than GOC bonds, what is? I can recall owning straight debentures/bonds from companies like Air Canada, Yellow Pages, GMAC and others that I have forgotten that were likely a lot more risky.



like_to_retire said:


> For me, when I get close to that risk, I'll buy the equity instead with the hope of greater overall returns and then stick to my fixed income knitting with GIC's and highly rated bonds. Keeping _"fixed income yield well above the CPI"_ is not conducive with protecting your capital. Isn't that the number one mission of fixed income allocation? Convertible debs need not apply...
> ltr


Having fixed income yield_* lower *_than CPI isn't conducive to protecting capital either. I want to have *real returns* that are at least positive! 

We have about 30 bonds and debentures from different companies and sectors. Diversification does help reduce risk and allow one to be less conservative.

Reading above, I see some are moving toward 100% equity. Maybe I am at least a bit more conservative than that


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## AltaRed (Jun 8, 2009)

agent99 said:


> I would not include a high % of CDs in my fixed income. However, they are usually of very short term (say 3 or 4 years), yield 5 or 6% int and have potential for capital gains if the underlying stock does well. Probably no more risky that same company's corporate bonds or stock. I use them along with pfds to boost FI allocation yield a bit. True they are not really risk free fixed income. But then I can recall owning straight debentures/bonds from companies like Air Canada, Yellow Pages, GMAC and others that I have forgotten that were likely more risky.


At least stay investment grade or a few notches higher, e.g. BBB+. I'd never buy an unsecured term note/debenture at a BBB- level. I remember the days when investors were sweating their GMAC and Yellow Pages debt holdings. I have purchased the odd term note that some high quality REITs issue, e.g. H&R, RioCan, etc. at BBB+. I even have an ENF term note at BBB+


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## james4beach (Nov 15, 2012)

CPA Candidate said:


> My father died earlier this year and his portfolio continued to grow despite withdrawals of dividends and installments from his RIF. The big reason this was possible was a portfolio that was 90%+ equities. If you want to sustain a portfolio while using some of it, it must grow. The the terrible thing that most retirees do is insist on low volatility through balanced portfolios. Those bonds don't grow and are taxed a higher rate than dividends.


Withdrawing dividends is one thing (a variable withdrawal method), but trying to take out constant withdrawals is another matter. If using the constant withdrawals + inflation method, the studies have shown that a portfolio with a mix of stocks and bonds lasts longer than a pure stock portfolio. This holds true even with newer studies that factor in lower anticipated bond returns going forward.

For that constant withdrawal regime, a 50/50 portfolio is about ideal. Boosting it to 80/20 or 90/10 increases sequence of return risk, and increases the probability of early portfolio depletion. However what I am saying is only true for certain specific parameters -- namely the SWR-style constant $ withdrawal plus annual inflation adjustment.


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## AltaRed (Jun 8, 2009)

james4beach said:


> For that constant withdrawal regime, a 50/50 portfolio is about ideal. Boosting it to 80/20 or 90/10 increases sequence of return risk, and increases the probability of early portfolio depletion. However what I am saying is only true for certain specific parameters -- namely the SWR-style constant $ withdrawal plus annual inflation adjustment.


Hence why SWR with such inflexibility is rubbish in my opinion. VPW works a whole lot better. One varies their withdrawals depending on the health of their portfolio. Of course, if one is blessed with a portfolio that one does not have to sell shares from in a bad year, so much the better.


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## lonewolf :) (Sep 13, 2016)

Food as money has stood the test of time. Developing a method to produce more food then one consumes I think would stand the test of time.


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## james4beach (Nov 15, 2012)

lonewolf :) said:


> Food as money has stood the test of time. Developing a method to produce more food then one consumes I think would stand the test of time.


But I can't live inside a tortilla shell


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## james4beach (Nov 15, 2012)

humble_pie said:


> what is the advantage of holding either bonds or bond funds during a near-inverted yield curve like we've been having though


Today provides a little example of the advantage of holding a bond fund (or portfolio of individual bonds), for volatility reduction. Today, stocks (say XIU/ZSP) were down -0.86% and bonds (XBB) were up +0.79% in a flight to safety. Therefore the 50/50 diversified investor was totally flat on the day, nil change.

Clearly this is an advantage of the bond fund, a cushion during rough times. This is an advantage you don't get from GICs or cash.


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## MarcoE (May 3, 2018)

james4beach said:


> Today provides a little example of the advantage of holding a bond fund (or portfolio of individual bonds), for volatility reduction. Today, stocks (say XIU/ZSP) were down -0.86% and bonds (XBB) were up +0.79% in a flight to safety. Therefore the 50/50 diversified investor was totally flat on the day, nil change.
> 
> Clearly this is an advantage of the bond fund, a cushion during rough times. This is an advantage you don't get from GICs or cash.


Another good reason to have gold. To provide a smoother ride.

James, on days like today, is it wise to invest a little money into equities if one has cash lying around?


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## Spudd (Oct 11, 2011)

james4beach said:


> But I can't live inside a tortilla shell


What if it was a really big tortilla shell?


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## agent99 (Sep 11, 2013)

james4beach said:


> Clearly this is an advantage of the bond fund, a cushion during rough times. This is an advantage you don't get from GICs or cash.


Can't believe you think that means anything. Are you going to do this every day? Or only on ones that support your theories?


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## james4beach (Nov 15, 2012)

agent99 said:


> Can't believe you think that means anything. Are you going to do this every day? Or only on ones that support your theories?


Sure it means something. It's an illustration of the benefit of holding inversely correlated asset classes in a portfolio. I agree that the short term (one day) action doesn't mean much, but the same effect works on the scale of months and years.


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## humble_pie (Jun 7, 2009)

james4beach said:


> Today, stocks (say XIU/ZSP) were down -0.86% and bonds (XBB) were up +0.79% in a flight to safety ... Clearly this is an advantage of the bond fund, a cushion during rough times. This is an advantage you don't get from GICs or cash.



well jas if i were to get all serious & solemn about this i'd have to say that one day's deviation swallow doth not a summer make

then i'd have to say that many serious posters upthread are saying that their bond funds have lost money over the years

then i'd have to do a metastudy - the kind that our genius moderator keeps popping out of his hat, quick as a wink - to show whether one day's up deviation in bonds could be smoothed into something comparable to a five-year downtrend

then i'd have to adjust my study for the recent multi-year bull trend in which stocks went up & bonds went up but liddlelamzeedivey, ie stocks went up more

lastly i'd have to factor in expectations of looming interest rate increases because they gonna do a number on bonds

whew! it's so much easier to just say i-don't-like-bonds


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## james4beach (Nov 15, 2012)

MarcoE said:


> Another good reason to have gold. To provide a smoother ride.


It's true that gold, another asset class with low correlations to the others, improves a portfolio when added along side stocks & bonds.



> James, on days like today, is it wise to invest a little money into equities if one has cash lying around?


I'd say to stick to your asset allocations, and rebalance them every 6 months or even once a year.


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## james4beach (Nov 15, 2012)

humble_pie said:


> then i'd have to say that many serious posters upthread are saying that their bond funds have lost money over the years


The posts I saw were looking at unit price and not counting distributions (not looking at total return). Either XSB or XBB held for at least a few years has returned a positive amount.



> lastly i'd have to factor in expectations of looming interest rate increases because they gonna do a number on bonds


Well ok, but I'll say again that it's both impossible to predict interest rates and time the bond market. A couch potato type of investor should just buy bonds (XBB or VAB) and stick with the bond allocation. That's the whole idea of the couch potato; to not try timing markets, and stick to a consistent strategy.

For the people who don't like bonds... you could buy GICs instead, in a 5 year GIC ladder. They also a cushion a portfolio against stock declines.

I realize some people just don't want bonds at all. They want the higher returns from stocks... that's just fine too. As long as they are comfortable with the volatility of stocks and potentially long stretches of weak/negative returns. It's hard to even visualize this on the heels of a 9 year bull market in stocks, but it will happen again some day.

For those who swear off bonds, I ask that they at least take a look at the performances of good quality balanced funds like the following. If this kind of steady annual return, and relatively good performance during bad years in stocks appeals to you, then you should probably be holding a bond fund (just as these funds do)

Mawer Balanced Fund performance
BMO Monthly Income Fund performance


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## humble_pie (Jun 7, 2009)

james4beach said:


> A couch potato type of investor should just buy bonds (XBB or VAB) and stick with the bond allocation. That's the whole idea of the couch potato; to not try timing markets, and stick to a consistent strategy.
> 
> For the people who don't like bonds... you could buy GICs instead, in a 5 year GIC ladder. They also a cushion a portfolio against stock declines.




jas4 there are a few things you might not have thought of. Might i hint at some of these. I'm not one to boast so these are hints only.

some-people-have-sufficient-income-that-they-OK-during-market-crashes
market-crashes-are-not-permanent-&-they-comfortable-w-volatility
average-bear-markets-something-like-18-24-months
plus-some-people-can-augment-investment-income
with-option-income-they-can-raise-$2000
in-a-single-option-trade-in-5-minutes
that-it-would-require-$100,000-GIC
held-for-an-entire-year
to-match






> I realize some people just don't want bonds at all. They want the higher returns from stocks... that's just fine too. As long as they are comfortable with the volatility of stocks and potentially long stretches of weak/negative returns.



long stretches of weak/negative returns (presumably you mean from dividends) are to be bolstered with option trades







> For those who swear off bonds, I ask that they at least take a look at the performances of good quality balanced funds like the following.


i do look at Mawer. It's a nice comfy granny. Although i prefer the Mawer tax-advantaged, because i understand what they're doing & it's pretty smart. Maybe there's a Mawer in my future, if i lose the option knack.


.


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## timemoveson (Nov 22, 2017)

*Hi folks!*



MarcoE said:


> A portfolio that you could live off -- forever. Is such a thing possible?
> 
> Sometimes, when we think about retirement, we think about decumulation. We imagine gradually using up our savings, year by year, until nothing is left. Like eating a big pie, slice by slice, until only crumbs remain. But what about a portfolio that could NEVER run out? That keeps replenishing itself, even as you withdraw money from it, even as inflation eats away at it? A portfolio that lasts FOREVER, no matter how long your retirement? A magical pie that keeps growing new slices, even as you keep eating?
> 
> ...


Hi folks, I've lurked on here for some time and do the same on FWF, ER.org, a few subreddits and a couple of other US and Canadian spots where like minded folks gather to talk about interesting things. 

Thought I might pitch in on this topic. The answer to the question asked is what I'm doing now with a large portfolio and asset base (e.g., $10M). 

While we were designing the lifestyle and family environment we wanted, we created a goal to try to establish a multi-generational, perpetual wealth machine intended to last, well, "forever", endowment style.

Ours is designed to spin out earnings in the range of say $300,000 pre-tax, at very favorable effective tax rates. There are a lot of additional safety buffers to draw on from tax deferred and deferred income buckets later or whenever is needed. I don't expect to use these until we have to (e.g. RRSP to RRIF drawdown, etc.) 

Diversified set of Canadian dividend paying equities, preferred shares, income funds and Canadian, US and International ETFs to round it out. Also significant REIT holdings, some privately placed debt. No magic to any of this, typical allocations to the buckets, just maybe more of each. Came largely from saving a lot from business earnings then investing it with this plan in mind. 

The focus heavily on risk management, staying neutral inflation at a minimum and looking for growth in earnings from dividends and rising interest rates. I am well tuned to political and market realities but make no fast moves. Everything slows down at this level, I think you don't need or want to overreact to anything. You get used to large daily fluctuations.

A good chunk of expensive personal use real estate and many hobbies to support along with the family! 

Happy to respond to any questions about it.


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## james4beach (Nov 15, 2012)

timemoveson said:


> Thought I might pitch in on this topic. The answer to the question asked is what I'm doing now with a large portfolio and asset base (e.g., $10M)
> . . .
> Ours is designed to spin out earnings in the range of say $300,000
> . . .
> Diversified set of Canadian dividend paying equities, preferred shares, income funds and Canadian, US and International ETFs to round it out. Also significant REIT holdings, some privately placed debt. No magic to any of this, typical allocations to the buckets, just maybe more of each.


Welcome to the forum, and thanks for posting!

Would you be willing to post a breakdown of your allocations by % including cash/fixed income amounts? I'm sure many people here would be very interested.


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## agent99 (Sep 11, 2013)

timemoveson said:


> Diversified set of Canadian dividend paying equities, preferred shares, income funds and Canadian, US and International ETFs to round it out. Also significant REIT holdings, some privately placed debt. No magic to any of this, typical allocations to the buckets, just maybe more of each.


Sounds pretty much same as we are doing - Except on "slightly" smaller scale  Except for the ETFs, that is.


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## OnlyMyOpinion (Sep 1, 2013)

timemoveson said:


> ... While we were designing the lifestyle and family environment we wanted, we created a goal to try to establish a multi-generational, perpetual wealth machine intended to last, well, "forever", endowment style.
> Happy to respond to any questions about it.


Multi-generational. So what is the nature of your estate planning and what do you mean by 'endowment style'?. 
Are/were your assets in a ccpc? A family trust?

We looked at options and decided to gift excess to our children over the next 10 years while they can best use and invest it. We'll fine tune over time and hope to die penniless.


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## My Own Advisor (Sep 24, 2012)

@timemoveson,

"Ours is designed to spin out earnings in the range of say $300,000 pre-tax, at very favorable effective tax rates. There are a lot of additional safety buffers to draw on from tax deferred and deferred income buckets later or whenever is needed. I don't expect to use these until we have to (e.g. RRSP to RRIF drawdown, etc.) 

Diversified set of Canadian dividend paying equities, preferred shares, income funds and Canadian, US and International ETFs to round it out. Also significant REIT holdings, some privately placed debt. No magic to any of this, typical allocations to the buckets, just maybe more of each. Came largely from saving a lot from business earnings then investing it with this plan in mind."

That is some MAJOR multi-generational wealth....kudos.

We invest in largely the same stuff...CDN stocks (about 30, the "usual names"), US ETFs like VYM to support the portfolio income and growth. If we could even earn $30k or $40k per year from our portfolio, given other assets (small workplace pension) I would be thrilled...


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## humble_pie (Jun 7, 2009)

OnlyMyOpinion said:


> Multi-generational. So what is the nature of your estate planning and what do you mean by 'endowment style'?.
> Are/were your assets in a ccpc? A family trust?
> 
> We looked at options and decided to gift excess to our children over the next 10 years while they can best use and invest it. We'll fine tune over time and hope to die penniless.




good for you. I am serious. This is a note of sincere appreciation for onlyMO's always-interesting innovations in estate planning. They are always worth respectful attention.


meanwhile a body posts for the 1st time in cmf forum & invites folks to consult him for advice because he's worth 8 figures? it's all me-me-me-me-n-my-tribe & there's not a whisper about philanthropy or even social awareness of others less fortunate?


as best i can recall cmf forum has hosted 3 previous self-declared 8-figures. One was also me-me-me-me, he didn't even have a tribe. One turned out to be a fraud being supported by his wife. One was a genuinely modest & talented individual who had successfully sold a business where he was the majority partner, after a lifetime of hard work in toronto.

perhaps it's worth mentioning that the genuine multi $$$ didn't post anything about his wealth until after he had launched & participated in a thread seeking advice about how to wind up & sell his partnership. He explained that he himself had always been the rainmaker & the principal driver, he had always carried the lion's burden of the business. His minority partners recognized his leadership & were happy to share the business profits pro rata. 

his objective in his thread was to explore how he could be as fair & as conscientious to his fellow workers as he possibly could be. They were all longtime friends & he wanted to remain friends, he said. How refreshing he was.

.


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## timemoveson (Nov 22, 2017)

james4beach said:


> Welcome to the forum, and thanks for posting!
> 
> Would you be willing to post a breakdown of your allocations by % including cash/fixed income amounts? I'm sure many people here would be very interested.


Thanks, happy to. As on all of these forums, YMMV.

Like I said, nothing different than what many of you are already doing successfully. Just a bit of scale. 

The breakdown today would approximate this:

Personal use assets:

- Personal use real estate, urban Toronto and vacation property: 25%

Paper assets:

- Fixed Income (ex-Canadian monthly income funds and Canadian private debt): 15%
- Canadian Preferred shares (actively managed fund): 5%
- REITs (individual and ETFs): 5%
- Canadian Dividend payers (individual and in ETFs): 45%
- US and International dividend payers (in ETFs only): 5%

No debt of any kind. I'm ok with this mix but watching the interest rate sensitivity given what is happening in the world.

This returns about 5% overall, not including the personal use real estate capital tied up. No monetary return there, only money going out but happy with it for now.

About $1M of of the paper assets are in RRSPs and TFSAs but I don't touch any of that at this point. They are all on DRIP now and the returns plow back in.


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## timemoveson (Nov 22, 2017)

OnlyMyOpinion said:


> Multi-generational. So what is the nature of your estate planning and what do you mean by 'endowment style'?.
> Are/were your assets in a ccpc? A family trust?
> 
> We looked at options and decided to gift excess to our children over the next 10 years while they can best use and invest it. We'll fine tune over time and hope to die penniless.


Hi, endowment style refers only to the perpetual design of the assets, to hopefully return adequately for the family but also last perpetually without any requirement to attack the principal amounts. There is no fancy legal structuring here, just the usual tax deferred, tax free and taxable buckets. 

Significant earnings were generated from business ownership both inside and outside CCPCs, so that is part of it for the long term. As you know, everything is tax integrated once it gets to an individual's hands so it makes little difference in the end. Some assets just happen to be housed there.

Kids, others and causes will get the benefits of this for a long time we hope.


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## AltaRed (Jun 8, 2009)

I agree with HP. Suddenly someone shows up with a $10M account and is talking me-me-me-me? This is a perfect legacy for a philanthropic endowment (foundation?) in the family name, perhaps with certain family members being involved in the decision making of how the endowment is invested and to what causes the income is allocated too. Here is a perfect example: https://www.castanet.net/news/Vernon/227358/1.45-million-to-rail-trail

I don't remotely have the kind of wealth that either the OP or the rail pioneer is talking about, but I see tremendous value in setting up an endowment to do support good causes in my Okanagan community. My sons stand to get sufficient gifting from their mother (my ex) and from myself while alive to be comfortable in their retirements. The rest needs to go to good causes and the challenge now is to determine how to define purpose, how to set it up and with whom, and how to manage it.

Added: Going off on a tangent on the rail trail thing. There are rail beds being abandoned in many areas. These are one time opportunities to capture them for recreational use and the success of https://www.myratrestles.com/ this venture years ago spawned the same rallying effort in the latest Okanagan Valley rail abandonment. Participated in letter writing and personal donations to get the valley municipalities to step up to the plate and buy the ROW. Once that was done, the Rail Trail initiative was started to fund the conversion of the rail bed to a hiking and biking trail. With hard work, these funds have been raised. Next up will be Phase 2 in 2019 and beyond to fund raise for exhibits along the trail, restroom facilities, etc, etc.


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## jargey3000 (Jan 25, 2011)

james4beach said:


> Welcome to the forum, and thanks for posting!
> 
> Would you be willing to post a breakdown of your allocations by % including cash/fixed income amounts? I'm sure many people here would be very interested.


ME would!....er, I mean. "I would"


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## Pineapple (Apr 27, 2018)

*definitely possible*



MarcoE said:


> A portfolio that you could live off -- forever. Is such a thing possible?
> 
> A portfolio that lasts FOREVER, no matter how long your retirement? A magical pie that keeps growing new slices, even as you keep eating?


I know it's possible because my grandmother's was like this... in fact, her retirement savings GREW BIGGER during retirement because its value increased each year by more than she withdrew from it.

I don't know how to invest this way though... I have to learn.


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## randint (Feb 13, 2014)

Yes, it could. I am trying to create one, but I am young and working in my first job, and doing it in a very stupid way, LOL.

$42 000/year pre-tax ($34 000 post tax). I live on $9 000/year LOL, and save $25 000/year. If only I can keep this job for 16 years, and can get a 2% real return annualized for an infinite amount of time, I will be able to retire and withdraw 2% of my total net worth every year, adjust it to inflation. Knowing that I can choose to work for 16 years and be permanently financially independent is an amazing feeling, I just have to hope that medical bills don't bankrupt me before I run out of time.


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## agent99 (Sep 11, 2013)

Hope this doesn't happen to you 

https://nypost.com/2018/05/22/parents-win-suit-to-kick-deadbeat-son-out-of-their-house/


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## randint (Feb 13, 2014)

No chance of that happening to me (my father is dead). Unless there is a compelling safety reason not to, I will live with my mother until either of us die. There is no reason why she would kick me out of her place, because her cost of living will go way up if she did that.


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## My Own Advisor (Sep 24, 2012)

like_to_retire said:


> All the standard stuff you associate with bonds.
> 
> Stability in a portfolio, consistent income, capital preservation, diversification from equities, etc.
> 
> ...


Totally agree. Why would you buy bonds to make money these days? You wouldn't. You hold them to thwart a major decline to an all-equity portfolio. If you're willing to ride out that portfolio value decline, then depending upon your financial goals and risk and timeline, then maybe you don't need bonds. I know some investors that don't hold any bonds. They prefer to hold a sizeable amount of cash instead.

Your mileage may vary...


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## agent99 (Sep 11, 2013)

My Own Advisor said:


> Why would you buy bonds to make money these days? You wouldn't.


We could reverse that and ask - Why would you buy bonds to lose money these days (or at best break even). Some here do, it seems.

I never buy anything that doesn't provide a reasonable real return after tax. Fixed income returns less because it has lower risk than our equities, but still has a positive real return of at least 1-2%, sometimes more. Pickings have been thin for the past while though, so risk has increased.


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## james4beach (Nov 15, 2012)

It's also possible that bonds/FI could provide a better return than stocks over the next 10 years. I've certainly seen this happen before during my life time.

XBB will return approx 2.6% annually over the next 10 years. The American AGG will return approx 3.2%. Stocks could return more than this, but they could also return less.


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## like_to_retire (Oct 9, 2016)

agent99 said:


> We could reverse that and ask - Why would you buy bonds to lose money these days (or at best break even). Some here do, it seems.
> 
> I never buy anything that doesn't provide a reasonable real return after tax. Fixed income returns less because it has lower risk than our equities, but still has a positive real return of at least 1-2%, sometimes more. Pickings have been thin for the past while though, so risk has increased.


All those risky investments could lose 25% and remain there for 10 years or more and you would think that a 3% GIC was the greatest investment you ever made.

You shouldn't expect to make money on your fixed investments after tax and inflation. That's not its purpose.

ltr


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## james4beach (Nov 15, 2012)

Lately, I've been hearing more people than ever say "I don't see any point in bonds at all". My boss at work was just saying this today too... he's loading up on stocks, sees zero point in holding bonds.

To me that shows way too much confidence in stocks, lack of fear, and possibly a high point in stocks.

Or you can hedge your bets and use a balanced asset allocation to cover you in either case. MAW104 has 8.4% cagr since inception, even RBF448 (a decent RBC balanced fund) 6.7% cagr since inception... are those returns really so bad? That's +3% to +5% _real return_ even with their bond holdings.


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## MarcoE (May 3, 2018)

agent99 said:


> We could reverse that and ask - Why would you buy bonds to lose money these days (or at best break even). Some here do, it seems.


Because at some point, the equity portion of your portfolio will lose 50% of its value. And it might take years to recover. A strong fixed income component protects you. During market crashes, people flock to bonds and gold. During the next crash, investors with a big chunk of their money in bonds and gold will be very grateful for owning them.


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## agent99 (Sep 11, 2013)

james4beach said:


> XBB will return approx 2.6% annually over the next 10 years.


And what would the real return be? More than likely negative?


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## agent99 (Sep 11, 2013)

like_to_retire said:


> You shouldn't expect to make money on your fixed investments after tax and inflation. That's not its purpose.
> 
> ltr


I don't expect to make much on FI, but at least not lose money in real terms. Like you, we have been through a few market cycles. That "risky" fixed income is spread across quite a number of issues and average maturity is not 10 years! More like 3 years. I may be a little less conservative than some here, but we have never had a default on our fixed income ever since we had enough spare cash to invest. We have on some equities. Luckily not much and our portfolio keeps growing despite spending whatever we want to.

By the way, for those preaching the FI gospel above, we do have enough FI that if our equities went to ZERO, we would still have enough to live off. That is how we determine how much FI we need. What actually happens when markets tank, is that the solid companies keep paying their dividends and we don't really care what the stock values are - we are not selling them anyway.


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## TomB19 (Sep 24, 2015)

james4beach said:


> Lately, I've been hearing more people than ever say "I don't see any point in bonds at all". My boss at work was just saying this today too... he's loading up on stocks, sees zero point in holding bonds.


For younger people, this is very likely the correct strategy. If you consider the average stock return over all recorded 30 year periods and compare that to the average bond return over all recorded 30 year periods, stocks outperform considerably. The problem with stocks is the risk of having to sell into a down market, as you get out to my age.

I no longer have the luxury of being all stocks and, when I did, I didn't have the guts to do it.


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## AltaRed (Jun 8, 2009)

agent99 said:


> By the way, for those preaching the FI gospel above, we do have enough FI that if our equities went to ZERO, we would still have enough to live off. That is how we determine how much FI we need. What actually happens when markets tank, is that the solid companies keep paying their dividends and we don't really care what the stock values are - we are not selling them anyway.


You are not helping yourself if your FI is BBB- (or lower) and you have to sell an asset to supplement your cash flow needs. Non-investment grade FI (and some investment grade FI) falls in market value just like equities. Ask anyone who had a Yellow Pages bond, or those who sweated it out in 2008/2009 on whether Ford, GM and others were going to actually pay out on their bonds at maturity. The point of having FI is just what you said..... If one's equities went to zero, you would still have enough to live off of. You don't have that if non-investment grade bonds implode.

P.S. To get a positive real return these days, one needs to have a minimum of 3-3.5% return depending on MTR. A few 5 year GICs are in the order of 3.1% these day but to get higher, one needs to get into at least BBB+ debt and most likely BBB issues, or unsecured term notes/debentures from the likes of ENF, REITs, etc. Anything less than an ENF would likely be too risky in a major equity bear market.


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## like_to_retire (Oct 9, 2016)

AltaRed said:


> You are not helping yourself if your FI is BBB- (or lower) and you have to sell an asset to supplement your cash flow needs. Non-investment grade FI (and some investment grade FI) falls in market value just like equities. Ask anyone who had a Yellow Pages bond, or those who sweated it out in 2008/2009 on whether Ford, GM and others were going to actually pay out on their bonds at maturity. The point of having FI is just what you said..... If one's equities went to zero, you would still have enough to live off of. You don't have that if non-investment grade bonds implode.
> 
> P.S. To get a positive real return these days, one needs to have a minimum of 3-3.5% return depending on MTR. A few 5 year GICs are in the order of 3.1% these day but to get higher, one needs to get into at least BBB+ debt and most likely BBB issues, or unsecured term notes/debentures from the likes of ENF, REITs, etc. Anything less than an ENF would likely be too risky in a major equity bear market.


You read my mind. And in fact, I had both the Yellow Pages (in the form of a pref share that went from $25 to $0.05 at sale), and also had a Ford bond. Man, I sweated that one because it was big.

Agent99, I won't rehash too much of what AR said, but as soon as you say you're making money after inflation and taxes with your fixed income, it means you're the pushing envelope. It's all great until it isn't. Don't be fooled by what your asset allocation is saying, but I don't have to really tell you this as you've been around. It's more of a warning for the younger crowd when they get into fixed income.

ltr


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## james4beach (Nov 15, 2012)

agent99 said:


> And what would the real return be? More than likely negative?


Bonds or GICs will have nearly zero real return at the moment. However as I said before, you never know what stocks will return over short periods like the next 5 years or 10 years. Fixed income could still return more than stocks.

Stocks could have a _negative_ real return. Every investor must consider that possibility, especially people who need the money within the next decade -- like myself.


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## MarcoE (May 3, 2018)

Each asset class is like a bucket you put some of your wealth into.

Some buckets contain cash. They have a little hole in the bottom called inflation. Most years, they lose about 2% of what's inside. The wealth trickles out of that hole.

Some buckets contains stocks. The stocks are planted into soil and grow nicely. But every once in a while, something kicks that bucket over, and half your stocks spill out.

Some buckets contain gold. They're pretty secure buckets, and it's nice to have one around.

Some buckets contain bonds and GICs. They can rock a bit, sometimes spill a little of what's inside, but overall are more secure.

We never really know what'll happen to each bucket. We don't know if one bucket will leak. If another will fall over and break. If one bucket might grow really, really nice returns, and another might crack open, while a third bucket might just kinda sit there. Nobody knows.

If the stock markets crash, we can say: "Oh, my buddy who put everything in gold and bonds--what a smart investor!" If the stock markets soar for years, we say, "Oh my friend who put everything into his equity bucket--what a smart investor!" But that's all hindsight. Right now, we cannot know what'll happen to each bucket.

So what do we do? We sprinkle our wealth into a variety of buckets. Sometimes one bucket will fall over. But the others will compensate for that. Will we make less money than our neighbor who chose to put everything into the winning bucket? Sure. But we'll do much better than the other neighbor who put everything into a losing bucket. Since we don't know what'll happen, we don't rely on luck. We diversify.

Fixed income is a very important bucket. Even if it only returns 2.5% - 3% right now. It's all part of sensible asset allocation. Sprinkle your wealth between different buckets. That way some of your buckets will do well, and if others break, you'll still be fine.


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## like_to_retire (Oct 9, 2016)

MarcoE said:


> Each asset class is like a bucket you put some of your wealth into.................
> 
> ...........snip..................
> 
> Fixed income is a very important bucket. Even if it only returns 2.5% - 3% right now. It's all part of sensible asset allocation. Sprinkle your wealth between different buckets. That way some of your buckets will do well, and if others break, you'll still be fine.


It's a nice way to look at it, but what we're questioning here is agent99's statement of: _"I never buy anything that doesn't provide a reasonable real return after tax. Fixed income returns less because it has lower risk than our equities, but still has a positive real return of at least 1-2%, sometimes more. Pickings have been thin for the past while though, so risk has increased."_

Now the "bucket" contents isn't a classic fixed income that generally loses a bit against inflation and tax, but now provides a return that is risky. I could put convertible debentures and junk bonds into a bucket labelled fixed income and feel false security because I followed the advice that I needed fixed income in my allocation, but that's a whole lot different than a bucket of GIC's.

ltr


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## MarcoE (May 3, 2018)

like_to_retire said:


> It's a nice way to look at it, but what we're questioning here is agent99's statement of: _"I never buy anything that doesn't provide a reasonable real return after tax. Fixed income returns less because it has lower risk than our equities, but still has a positive real return of at least 1-2%, sometimes more. Pickings have been thin for the past while though, so risk has increased."_
> 
> Now the "bucket" contents isn't a classic fixed income that generally loses a bit against inflation and tax, but now provides a return that is risky. I could put convertible debentures and junk bonds into a bucket labelled fixed income and feel false security because I followed the advice that I needed fixed income in my allocation, but that's a whole lot different than a bucket of GIC's.
> 
> ltr


Personally my fixed income is a combination of bond ETFs, GICs, and a savings account. I don't know what'll happen to interest rates or bond fund prices. Maybe they'll lose money. Maybe they'll make money. I don't know, so I diversify. Maybe the GICs will do better and my bond funds will lose money. Maybe the stock market will decline, people will run to bond funds, and my units will gain value. Interest rates will probably rise, but maybe they won't. Even if bonds/GICs today aren't making real returns, they're preserving capital and offer safety alongside riskier investments.


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## AltaRed (Jun 8, 2009)

IOW, fixed income is really not fixed income if there is material capital risk (notwithstanding the terminology 'fixed income' is a bit of an oxymoron). Fixed income for portfolio stability means 'return of capital' rather than 'return on capital'.


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## james4beach (Nov 15, 2012)

AltaRed said:


> IOW, fixed income is really not fixed income if there is material capital risk (notwithstanding the terminology 'fixed income' is a bit of an oxymoron). Fixed income for portfolio stability means 'return of capital' rather than 'return on capital'.


I agree, and I would never hold junk bonds or other low grade things like emerging market debt under my fixed income allocation. For me, fixed income allocation must be safe things.

By the way, Manulife (with 'A' credit rating) 5 year GICs are 3.05%, so it is a positive real return. I think the 5 year GIC ladder will generally give you a slightly positive real return over time.


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## agent99 (Sep 11, 2013)

AltaRed said:


> IOW, fixed income is really not fixed income if there is material capital risk (notwithstanding the terminology 'fixed income' is a bit of an oxymoron). Fixed income for portfolio stability means 'return of capital' rather than 'return on capital'.


"Fixed Income" is a bit misleading. Perhaps it was meant to indicate that holders would receive a fixed amount of income based on the par value of the bond or debenture? 

Regarding RISK: All fixed income has risk. Not just of default (credit risk), but also interest risk, inflation risk, market risk. The bond rating agencies only cover credit risk. However, all the other risks apply regardless of the bond ratings. In some cases, it might be better to buy bonds with higher credit risk. They have higher yields and are less likely to incur losses resulting from interest rate and inflation risk. 

I may tend to hold a bit higher credit risk fixed income portfolio than some. Overall risk is however, reduced by laddering and diversification and result is higher overall yield.

One thing that would be useful, would be if the on-line brokerages provided the ratings of the bonds held. I would have checked them when purchased, but now have no idea what the ratings are. And it is a lot of work to go look up each one! 

By the way, some of above thoughts are as a result of reading the bond section on this useful OSC page: https://www.getsmarteraboutmoney.ca/invest/investment-products/ Going to go back and read some of the other sections too.


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## AltaRed (Jun 8, 2009)

agent99 said:


> One thing that would be useful, would be if the on-line brokerages provided the ratings of the bonds held. I would have checked them when I purchased, but now have no idea what they are. And it is a lot of work to go look up each one!


Scotia iTrade provides credit rating for every one of their listings. You can check mark BBB for example and get all of BBB high, BBB, BBB low and if you want, check mark off A as well and get A high, A, A low. I buy all my fixed income products in my iTrade account. The few times I looked, they don't carry anything below investment grade (BBB low).

Added: Or don't have sub-investment grade in inventory when I've occasionally looked.


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## agent99 (Sep 11, 2013)

AltaRed said:


> Scotia iTrade provides credit rating for every one of their listings. You can check mark BBB for example and get all of BBB high, BBB, BBB low and if you want, check mark off A as well and get A high, A, A low. I buy all my fixed income products in my iTrade account. The few times I looked, they don't carry anything below investment grade (BBB low).
> 
> Added: Or don't have sub-investment grade in inventory when I've occasionally looked.


Looks like BMOIL could learn something from iTrade! 

On BMOIL, it seems that they only have investment grade bonds available for on-line trading. Not sure what investment grade is at BMOIL, but they also list higher yield bonds and in the description it says (HY). To buy those, you have to call in. Never done that, so presumably all my bonds are investment grade! Actually I do have some Laurentian Bank bonds. At time I bought them they were not (HY), but now they are! On further checking, two others have also moved to HY! One was Sobeys, other a REIT, IIRC.


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## james4beach (Nov 15, 2012)

I also like iTrade's fixed income section (it's now where I do all my bonds and GICs). They even show DBRS credit ratings for the GIC issuers. So for example you can see that the highest yield GIC with an A-grade issuer is Manulife.


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