# Fixed income outperformed TSX (10 years)



## james4beach (Nov 15, 2012)

Over the last 10 years, fixed income (approximated by XBB and similar to a GIC ladder too) has outperformed the TSX Index (XIU). These charts include dividends:

XIU +50% total return: http://stockcharts.com/h-sc/ui?s=XIU.TO&p=D&st=2005-09-29&en=(today)&id=p33257263375
XBB +58% total return: http://stockcharts.com/h-sc/ui?s=XBB.TO&p=D&st=2005-09-29&en=(today)&id=p98182507658

Hopefully this is a good illustration that stocks are not always superior, _nor are they the only viable method of investment_. Many people on this board (like fatcat) have given me a very hard time for my heavy bond and GIC allocations, claiming that unless I go heavy into stocks, I will fall behind. Well, as you can see, I have not fallen behind due to avoiding stocks.

Just imagine ... government-insured (risk-free) GICs have returned more than the stock market over a decade! Incredible.

I'm hoping that novice investors coming here will see that fixed income, even GICs, can be good investments and that you don't necessarily have to go into stocks. There might not even be an advantage to take on stock exposure. What good are stocks if over 10 years, you do about the same as GICs?

I'm also hoping that this is a good reminder to everyone that you should have a mix of stocks and fixed income.


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## cainvest (May 1, 2013)

James, which series of yearly returns would you rather have over the past 5 years?

#1> 6.36	9.38	3.26	-1.50	8.46

#2> 13.60	-9.23	7.87	13.03	12.04

#3> 15.20	6.34	9.05	13.49	12.91


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## GoldStone (Mar 6, 2011)

james4beach said:


> Over the last 10 years, fixed income (approximated by XBB and similar to a GIC ladder too) has outperformed the TSX Index (XIU). These charts include dividends:


The charts don't tell the whole story. The charts show the performance of a lump sum investment at the start of the 10 year period. This is not how most of us invest.

To do a proper comparison, model DCA approach. Most of us invest equal amounts on an annual basis. RRSP contributions, TFSA contributions, etc.

I'm not saying that proper modelling will yield a different result, btw. It's just that cherry-picking the start and the end dates is a wrong way to go.




james4beach said:


> Just imagine ... government-insured (risk-free) GICs have returned more than the stock market over a decade! Incredible.


There is nothing incredible about that. Any student of market history knows that stocks don't always outperform on a 10-year basis.




james4beach said:


> I'm also hoping that this is a good reminder to everyone that you should have a mix of stocks and fixed income.


Right.


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## andrewf (Mar 1, 2010)

Funny, because the outperformance of bonds is due to the central bank manipulation you have been decrying...


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## HaroldCrump (Jun 10, 2009)

andrewf said:


> Funny, because the outperformance of bonds is due to the central bank manipulation you have been decrying...


That is true :biggrin:


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## humble_pie (Jun 7, 2009)

james4 i think if u'd take a lifetime measure, something like half-a-century, you'd find bonds trailing.

now imagine somebody who doesn't have a whole lifetime left. A retired person looking for a useful investment for perhaps 20 years. The very fact that bonds have performed so well over the past 10 years - because of outrageously low interest rates - probably means that in the coming cycle bonds are going to lag behind, no? we're close to zero interest, bonds have nowhere to go.


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## GoldStone (Mar 6, 2011)

andrewf said:


> funny, because the outperformance of bonds is due to the central bank manipulation you have been decrying...


zing!


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## BoringInvestor (Sep 12, 2013)

To give a real-life example, I hold both XIC.T (an ETF tracking the _capped_-Canadian index) and the already mentioned XBB.T.

My annualized rate of return (using the XIRR function in Excel) since December 2012, including dividends, reinvested dividends, and periodic rebalances, are:
XIC.T - annualized return of 4.05%.
XBB.T - annualized return of 3.60%.

A few months ago the annualized return for XIC.T was around 8-10%, and XBB.T was around 2%, but the recent market turn has narrowed the gap between the two.


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## fatcat (Nov 11, 2009)

the question is not what has happened but will will happen james (if what has happened in the past was really an accurate guide to what was going to happen in the future, we would all be making a lot more money :smilet-digitalpoint)

you have 40 years of investing life left

any scenario that will see bonds and gic's outperforming the biggest and best companies on the planet over the next 40 years is not going to be a pretty one, not at all

equities are not numbers james, they are not prices and earnings, they are products and goods and services that people need and want, that's why you should invest in equities

but hey i have shifted to 60% bonds and gic's and plan to stay there for awhile

but of course i have no plans to live to 110 :hopelessness:


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## agent99 (Sep 11, 2013)

While we are cherry picking, I used longrundata to provide total returns for XIU,XIC,XSB,XBB. Used Feb 22, 2001 as starting date because that was first date available for XIC.

XIC - 5.48%
XIU - 5.36%
XBB - 4.34%
XSB - 3.07%

For a 10yr period ending yesterday

XIC - 4.4%
XIU - 4.65%
XBB - 4.64%
XSB - 3.35%

A balanced fund - TDB622 (TD Monthly Income fund), almost outperformed all of those over 10 yrs despite a 1.47% MER

XIC - 5.45%
XIU - 5.68%
XBB - 4.57%
XSB - 3.3%
TDB622 - 5.44%


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## BoringInvestor (Sep 12, 2013)

agent99 said:


> While we are cherry picking, I used longrundata to provide total returns for XIU,XIC,XSB,XBB. Used Feb 22 starting date because that was first date available for XSB.
> 
> XIC - 5.48%
> XIU - 5.36%
> ...


One detail - the TDB622 performance is as of August 31st, while all the ETFs are up to today (and include September's decline).


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## agent99 (Sep 11, 2013)

BoringInvestor said:


> One detail - the TDB622 performance is as of August 31st, while all the ETFs are up to today (and include September's decline).


That is true, but I did run the others for the same time period. Just did not post details. TDB622 did come close to beating the other 4 etfs for period ending Aug 31st. I posted the results in earlier post. Surprising considering the MER. It does hold higher yielding equities and quite a bit of fixed income. Quite good option for small portfolio.


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## CalgaryPotato (Mar 7, 2015)

Well it's a good reminder of a few things.

a) You should have a diversified mix of investment products.
b) 10 years is NOT a long period for investing. The way some people on this forum talk, it's like anything more than 2 years is a long term investment and should be in the market. 
c) The idea that the Canadian market is in a huge bubble that should be crashing anytime now, isn't really true.


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## james4beach (Nov 15, 2012)

Wow, very good replies on this thread. Thanks everyone!

Although XBB has benefited from the central bank stimulus, the GIC yields have not. Central bank action has made GIC yields very low.


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## james4beach (Nov 15, 2012)

CalgaryPotato said:


> b) 10 years is NOT a long period for investing. The way some people on this forum talk, it's like anything more than 2 years is a long term investment and should be in the market.


Right. I've brought this up frequently... 10 years is getting in the range of "long enough" but to be truly confident you will get positive returns, you actually have to go for more like 20 or even 30 year periods.


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## james4beach (Nov 15, 2012)

humble_pie said:


> james4 i think if u'd take a lifetime measure, something like half-a-century, you'd find bonds trailing.


I suspect you're right. I previously have pointed to Shiller's research, which does show that in the 40 year range, the stock market starts to very nicely reflect long term GDP growth. At least in the US, it has.



> now imagine somebody who doesn't have a whole lifetime left. A retired person looking for a useful investment for perhaps 20 years. The very fact that bonds have performed so well over the past 10 years - because of outrageously low interest rates - probably means that in the coming cycle bonds are going to lag behind, no? we're close to zero interest, bonds have nowhere to go.


I suspect you're right about that too. Bond prices are insanely high. I used to regularly buy Government of Canada bonds, and I just can't buy them at these prices... it's nutty.

Note, however, that just because bonds prices are in a bubble doesn't mean that stock prices are the better (relative) buy. They could both be in a bubble, and equities do have more inherent price risk.


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## Moneytoo (Mar 26, 2014)

«All told, then, the 20 years ending in 2014 were a magnificent time to be a bond investor in Canada, and a pretty difficult one for anyone with a global equity portfolio. If you have a time machine, it certainly would make sense to transport yourself back to 1995 and put your entire portfolio in 20-year bonds.»

http://canadiancouchpotato.com/2015/04/07/ask-the-spud-do-aggressive-portfolios-pay-off/

20 years might be too far of a travel for me, but I wouldn't mind going back to the beginning of this year and buying some 3% 5-year GICs... lol After 2 rate cuts this year (while waiting for the opposite), I think we're ready to start a GIC ladder next January (but no government or even provincial bonds, thank you very much, not until they yield more than 1.45% HISA... )


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## james4beach (Nov 15, 2012)

As I recall, when I brought up good deals in GICs like in the 3% ballpark, people quickly dismissed it with: you're crazy, why would you buy 5 year GICs at such low rates?

*This* is why.


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## Moneytoo (Mar 26, 2014)

Well my husband had a 3% People Trust TFSA (GIC-like, but the money's not locked in) I asked him in January to lock some in a 5-year GIC. He said why lock if the rates have nowhere to go but up? I said what if they go down? He said no way...

Soon after the January rate cut his PT TFSA rate was reduced to 2.5%. Again, I suggested to buy some 5 year GICs, again, he said why lock for 5 years if the rates will go up for sure now...

After the second rate cut his PT TFSA was reduced to 2% - and he agreed to transfer the money to Questrade and buy Couch-Potato-ish index ETFs instead lol And now that Garth started hinting that there might be a third rate cut in October - I made my husband promise that we'll start a GIC ladder in January no matter the rate (which we should've done last year - but oh well, not our biggest investing mistake... )


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## agent99 (Sep 11, 2013)

james4beach said:


> As I recall, when I brought up good deals in GICs like in the 3% ballpark, people quickly dismissed it with: you're crazy, why would you buy 5 year GICs at such low rates?
> 
> *This* is why.


Why when, for very little risk, you could buy investment grade corporate debentures and other FI like securities yielding almost twice as much? I haven't bought a GIC since they dropped below 5%.:biggrin:


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## Belguy (May 24, 2010)

I hope that this is not off topic but does anyone know of a current fixed income investment that pays a guaranteed 4 per cent annual rate of return? I know of someone who claims that they are currently receiving that rate which is above any GIC's that I am aware of.


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## andrewf (Mar 1, 2010)

That person is either embellishing or doesn't understand the product/definition of the word 'guaranteed'.


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## My Own Advisor (Sep 24, 2012)

andrewf said:


> That person is either embellishing or doesn't understand the product/definition of the word 'guaranteed'.


+1

Nothing is 'guaranteed' long-term of 4%.


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## agent99 (Sep 11, 2013)

Belguy said:


> I hope that this is not off topic but does anyone know of a current fixed income investment that pays a guaranteed 4 per cent annual rate of return? I know of someone who claims that they are currently receiving that rate which is above any GIC's that I am aware of.


There are many fixed income investments that have a yield to maturity of 4% or more. These would be corporate bonds and the maturation date could be anything from a few years to way in the future. Some corporate debenture are yielding 5 or 6% to maturities in the 2018-2020 range. There are split preferreds too with fixed maturity that yield in the 4-6% range.

None of these have as low a risk as GICs


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## james4beach (Nov 15, 2012)

agent99 said:


> Why when, for very little risk, you could buy investment grade corporate debentures and other FI like securities yielding almost twice as much? I haven't bought a GIC since they dropped below 5%.:biggrin:


Like what, agent99 ? There are certainly higher yielding things, with significantly higher risk.


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## LBCfan (Jan 13, 2011)

andrewf said:


> That person is either embellishing or doesn't understand the product/definition of the word 'guaranteed'.


Or is listening to salesperson from IG. EJ, RJ etc. Of course he's being misled but the company has weasel-words in the contract.


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## james4beach (Nov 15, 2012)

Ooops agent99, ignore my last question -- I see you spelled out examples and mention that they're higher risk too.

If someone wants real high risk, you could buy an American junk bond ETF with approximate ytm of 7%. I advise against it of course... the 7% yield doesn't do you much good when the price declines 20%. You're also exposed to large numbers of defaults... those high yields can become very disappointing.


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## Moneytoo (Mar 26, 2014)

Did you watch Carl Icahn video?  Here's the scoop about junk bonds if not: http://www.cnbc.com/2015/09/29/icahns-bold-warning-about-icahn.html


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## lonewolf (Jun 12, 2012)

GoldStone said:


> I'm not saying that proper modelling will yield a different result, btw. It's just that cherry-picking the start and the end dates is a wrong way to go.


 Numbers, statistics & math, data mine an edge, cherry pic the odds best in your favour to give the best edge. I sure would not want to cherry pic the odds that gave me the worst odds. Become a market historian, be patient cherry pic, cherry pic, cherry pic when the numbers, statistics & math are in the best to your favour to place the money on the table. Make a cherry pie from picking cherries

Often I have herd people say stay away from data mining while I say do the complete opposite & data mine. The start & end dates of when to place money on table as well as when to remove is the exact thing that needs to be looked @ of course money management & a method that fits your personality also needs to be used.






market is @ 5000 year low in interest rates. Could get interesting record low interest rates going back 5000 years, sky high record highs in dow on record high margin debt. ( Dow 1000 might not be as krazzy a call as some might think) The data I use points to aprox 2022 for historic low.


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## agent99 (Sep 11, 2013)

james4beach said:


> If someone wants real high risk, you could buy an American junk bond ETF with approximate ytm of 7%. I advise against it of course... the 7% yield doesn't do you much good when the price declines 20%. You're also exposed to large numbers of defaults... those high yields can become very disappointing.


That is one reason I avoid bond etfs altogether. For fixed income, I want it to be* fixed* - not subject to variations in unit prices due to markets. As a result, I buy individual bonds, retractable preferreds (nowadays only splits) and convertible debentures. All with known maturity dates. I used to also have a GIC ladder


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## lonewolf (Jun 12, 2012)

Belguy said:


> I hope that this is not off topic but does anyone know of a current fixed income investment that pays a guaranteed 4 per cent annual rate of return? I know of someone who claims that they are currently receiving that rate which is above any GIC's that I am aware of.


 They could have bought a long term bond years back. Anyone that bought an annuity back in early 80s are making out like bandits.


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## agent99 (Sep 11, 2013)

lonewolf said:


> They could have bought a long term bond years back. Anyone thought bought an annuity back in early 80s are making out like bandits.


That is true. I recall thinking about buying long term GOC bonds about 15 years ago. I think they yielded about 6%. Being naive, I bought Income Trusts instead


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## james4beach (Nov 15, 2012)

I regret it too, but hindsight is 20/20. Back then we actually had normal interest rates and a normal economy... 6% did seem like barely appropriate compensation for such long durations.

Of course, if any of us had known that the economy would get into a 10 year slump, we would have allocated capital very differently.

The nice thing about a bond fund or GIC ladder is that you are routinely buying new securities. In the case of GICs, you are always buying the best yields available at the time. Today when you do that you might get 2.5% for the new GICs. One should not speculate on which direction the yields are heading, but just stick to the routine and keep filling the ladder.


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## agent99 (Sep 11, 2013)

One thing that has not been considered, is the after tax return. Fixed Income may have performed close to equities in recent past, but not on an after tax basis.

I have zero fixed income in unsheltered accounts.


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