Bond ETF while Equities at Record High

[kbk769]

I have a decent understanding of why it's never a good idea to try and "time the market", but with equity indexes currently at all time highs, yield curve inversion and other factors, would choosing a bond ETF be a reasonable alternative at this time? I'm Canadian, so I'm looking at Vanguard's Canadian Aggregate Bond Index (VAB) vs their all cap Equity Index (VCN). The management fees are still very low and similar, yield on VAB is about the same as VCN at around 2.7%. Most indications right now are that there will be no interest rate increases for 12 months, so that should leave the principal safe. Meanwhile if equities drop, there should be a movement into fixed income and potential interest rate cuts to stimulate, which would drive up the market value of existing bonds (and ETF's that hold them).

Have considered the opportunity cost of missing out on 12 months of gains in equity, but I feel like this is a good temporary position. Tax consequences can be ignored as this is a strategy I'm considering for my TFSA.

Open to thoughts and ideas. Thanks!

[Car Jack]

Here's how to look at it.

You have an Asset Allocation chosen, right?  If you don't, you've got pre-work to do first.

Now, this is easy.  Look at your investments and if you've got a spread sheet like I have, I see my target AA right on the spread sheet.  Next to those numbers, I have actual AA listed.  What needs to be pumped up?  If it's equities, I take my new investment money and buy equities.  If it's bonds, I take my new investment money and buy bonds.

Maybe re-read the last paragraph to be sure, but can you point out anything about market highs or timing?  No?  Look carefully.  Still No?  There ya go.

Also, the market on average hits a new high every 18 days (at least for the last 100 years).  So if you don't get in now, you're going to pay more later.

[MustacheAndaHalf]

First, the false yield curve inversion: financial programs have been tracking the 2 year and 10 year yields for a long time... and then suddenly they're talking about an inversion with the 30 day yield?  Nobody's tracking that - it's sensationalism.  The 2 year and 10 year have not inverted, and the market hasn't panicked.  So drop that from your list of criteria.

Equity indices are nearly always at all time highs - it's inevitable with something that grows.  If you put money in a savings account at 2% interest, that account is always getting bigger - always reaching "all time highs".  It just means the stock market tends to go up.

A far more critical point: the crowd is wrong.  The crowd panics when stocks plunge to lows.  So when your information tells you to be scared, you'd be selling at a low point.  And when do you get back in?  When everyone is excited and happy with stock market results?  But that's after a long bull run, when you've already missed the gains.

[habanero]

You also have to consider the low bond yields, which is recent time is rather new concept. If interest rates were to rise now the correlation between bonds and stocks would be positive. And no rate increase for 12 months by your chosen central bank does not mean that bond yields cannot go up (price down) - longer-term interest rates can live quite a life of their own. Over the last 12 years (picked to include some time before the financial crisis) the spread between 2y and 10y US treasuries have been in the range of -0,065% to 2,9%.

Another factor is that credit spreads can blow out from their (rather close to) all-time lows, which also will have negative value on bond prices. Its not just equities that are at all-time-something. Credit spreads are at pretty much all time lows as well. And a lot of investment-grade debt is just one notch above junk status so downgrades might trigger massive forced selling from funds only allowed to hold investment-grade and have bought lower and lower credit quality in a yield hunt.

It becomes very clear in Europe. If you lend money to the German government by buying German govvies your yield for 5y is about -0,40% and for 10y its pretty much bang at zero. There is a fair ammount of returnless risk around in bond space.