Author Topic: Bonds for Canadian Investors?  (Read 4002 times)

Retire-Canada

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Bonds for Canadian Investors?
« on: November 01, 2017, 09:54:55 AM »


I'm getting close enough to my FIRE $ target that I am starting to think about the next steps for my investing plan. Currently I am 100% stocks. Before I FIRE I would like to add ~$120K in bonds to my portfolio in my RRSP to mitigate a poor early sequence of returns. $120K is ~3yrs spending with a slight reduction in my COL so I figure that will allow me to weather a crash without depleting my stocks at low valuations. With an easy side-gig I can stretch that $120K out to ~6yrs if I feel the need.

I have no plans to rebalance this part of my portfolio I'll just let the $120K ride and either spend it if there is a crash or let my stocks out run it if there is no crash. Presumably at some point there will be a crash and these bonds will get spent. Assuming by the time the bonds do get spent my portfolio is healthy and past the early sequence of returns risk phase of FIRE I don't plan to replace the spent bonds.

I know very little about bonds and bond ETFs...especially from a Canadian perspective. So I am looking for some suggestions as to what I should specifically be buying to achieve my goals above. If you want to suggest something else like GICs, gold or other safe investments I am open to that if you can make a compelling argument. My keep requirements are 1) investment tool is not likely to be pummelled in a crash when my stocks are 2) can survive inflationary impacts for the first 10yrs of my FIRE and 3) not complex.

What are your thoughts?
« Last Edit: November 01, 2017, 09:58:56 AM by Retire-Canada »

FIRE_at_45

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Re: Bonds for Canadian Investors?
« Reply #1 on: November 01, 2017, 10:55:43 AM »
PTF

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Re: Bonds for Canadian Investors?
« Reply #2 on: November 01, 2017, 10:57:44 AM »
Following with interest.  I have 20% of our investment assets in bonds but may increase that to peak at 30% at FIRE.   Currently in ZAG because the spud recommends it.  http://canadiancouchpotato.com/wp-content/uploads/2015/01/CCP-Model-Portfolios-ETFs-2016.pdf

Lews Therin

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Re: Bonds for Canadian Investors?
« Reply #3 on: November 01, 2017, 11:22:22 AM »
PTF.

Not a big fan of bonds, It seems like right now they have such low returns, that the losses (comparatively to) from not being in things like REIT or preferred shares weakens the 4% rule. If you are taking out 3 years in bonds, will that still be enough for you to FIRE? Since you are now working with a 120k handicap (your bonds aren`t going to work the same as a index/bond rebalancing plan)

Kaspian

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Re: Bonds for Canadian Investors?
« Reply #4 on: November 01, 2017, 11:22:53 AM »
I've read lots of your posts/replies and I'm always 100% in agreement with you, Retire-Canada.  Also, you're generally way smarter than I am.  I am a fan of bonds (own TD eSeries in registered accounts and ZDB in non-registered) and currently have 40% of my portfolio sitting in them.  There are several upticks in interest rates coming in the next couple of years as recovery/stimulus winds down and each one of those will kick the value of bonds hard in the teeth.  First week in October was a very difficult time for bond owners, with values going around 2011 and 2013 low levels.  While we should gradually see an increase in dividends shelled out (and that's what you're aiming for), it's a rocky ride when the US & Canadian markets soar but your portfolio stagnates or drops because of the bond weighting.  Don't get me wrong, I plan on keeping my 40% and rebalancing accordingly, but I wouldn't do a big switcheroo anytime soon.  Knowing you're looking at the income and not at making capital gains on bonds, maybe DCA a percentage more in each year on a set schedule or something like that? 

Retire-Canada

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Re: Bonds for Canadian Investors?
« Reply #5 on: November 01, 2017, 11:27:10 AM »
Knowing you're looking at the income and not at making capital gains on bonds, maybe DCA a percentage more in each year on a set schedule or something like that?

Thanks for the kind words. My thought is to do a big stock for bond swap really close to my FIRE date or at least the point where I am giving notice to my clients that my departure is imminent. That's mostly to stay 100% stocks to capture whatever growth I can and also because I won't FIRE into the teeth of a major crash even if I had $120K in bonds. I feel pretty secure about my ability to emotionally weather a big crash once FIREd, but being realistic I don't have the balls to pull the FIRE trigger if one happens just before I FIRE.

Kaspian

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Re: Bonds for Canadian Investors?
« Reply #6 on: November 01, 2017, 11:36:24 AM »
a) I'm envious of all this.  I don't envy easily and am ~5 years out.  And
b) "I feel pretty secure about my ability to emotionally weather a big crash once FIREd"  <-- Yeah, you'll be fine.  Your psychology is strong strong against all the timing, bull/bear, panic, headlines nonsense.

Retire-Canada

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Re: Bonds for Canadian Investors?
« Reply #7 on: November 01, 2017, 11:46:37 AM »
a) I'm envious of all this.  I don't envy easily and am ~5 years out.  And
b) "I feel pretty secure about my ability to emotionally weather a big crash once FIREd"  <-- Yeah, you'll be fine.  Your psychology is strong strong against all the timing, bull/bear, panic, headlines nonsense.

Don't get too envious I am still a couple years out still from full FIRE. ;)

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Re: Bonds for Canadian Investors?
« Reply #8 on: November 01, 2017, 11:56:13 AM »
I buy and hold VAB 25% and have $21k of VSB as my "big" emergency fund.  IPS says to sell my equity annually to rebalance if cash contributions aren't enough to stay at 25% VAB.

My takeaway is to hold bonds for more than maturity, and remember that interest is not calculated into the % performance showing in your account. Look at the total value, inculding your cash as it grows.  My $21k VSB appears to be stagnant, but that's because I reinvest interest didn't DRIP into equity.

Retire-Canada

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Re: Bonds for Canadian Investors?
« Reply #9 on: November 01, 2017, 01:03:13 PM »
My $21k VSB appears to be stagnant, but that's because I reinvest interest didn't DRIP into equity.

Although I wouldn't rebalance the $120K of bonds I would reinvest the interest to help keep pace with inflation.

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Re: Bonds for Canadian Investors?
« Reply #10 on: November 01, 2017, 01:13:09 PM »
120k will DRIP alot more effectively that 20k.  I add one unit a month with a few dollars added to the cash pile for my next buy of VCN with annual contribution.

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Re: Bonds for Canadian Investors?
« Reply #11 on: November 01, 2017, 02:32:35 PM »
I think your plan is solid RC. I am not sure which is the best way to invest your bond dollars. Canadian Couch Potato recommends BMO Aggregate Bond Index (ZAG).

(thinking outside the bond box)
You could pay off your mortgage, and use some form of reverse mortgage as an option to cover you during a bad sequence of returns during the early years.
 
I have read a lot of posts about how bonds in the short term are not looking good. A few mentioned high interest savings accounts with promotion interest rates could have the same returns or better with less risk if you are under the Canada Deposit Insurance Corporation (CDIC) limits per account. Others say if Bonds are a long term part of your plan you shouldn't care about the short term and just stick to the your plan and your AA.

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Re: Bonds for Canadian Investors?
« Reply #12 on: November 01, 2017, 04:51:11 PM »
I hold roughly equal amounts of VSB and VAB in my RSP since I'm not comfortable with 100% equity. Like BB, I also set up my portfolio based on the Canadian Couch Potato chart. Except a chunk of my stash was invested when The Potato was recommending VAB over ZAG so I've just continued with that.

Are the equities you're planning to sell in your RSP or TFSA? If not, have you considered cap gains tax?

Retire-Canada

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Re: Bonds for Canadian Investors?
« Reply #13 on: November 01, 2017, 04:53:13 PM »
Are the equities you're planning to sell in your RSP or TFSA? If not, have you considered cap gains tax?

The stocks I'd sell to buy bonds will be in my RRSP so no tax implications. It doesn't make sense to hold them in my TFSA or NR accounts.

FIRE_at_45

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Re: Bonds for Canadian Investors?
« Reply #14 on: November 01, 2017, 08:13:59 PM »
I only own ZAG based on CCP's recommendation as well.  My strategy is similar to RC's in that I just want to hold enough for 3 years and I'll own it entirely in my RSP. 

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Re: Bonds for Canadian Investors?
« Reply #15 on: November 01, 2017, 09:04:19 PM »
Wow... Bonds are a surprisingly popular topic!

I retired this year at age 59. My portfolio is mostly index based (CCP). 60% equity / 40% fixed income. The FI is about half in 5 year GIC ladders and half in VAB. All the FI is in RRSP/LIRA accounts and the GICs are all purchased through my discount broker (TDDI).

Much earlier I was 100% equity, but my belief is that investors saving for retirement that want a bond component should start gradually adding bonds about 10 years before retirement. The reason for that is that equities can get out of whack with fundamental value for years. The S&P500 hit a peak in the late 1960s, and it did not consistently exceed that level again until the early 1980s. It again hit a peak in 2000 and did not consistently exceed that after the tech crash and great recession until 2012. A long time. I did not want to be 2 years away from retiring and get hit with a major market crash.

Like R-C I hope the markets do well enough that I can live off my equities (plus CPP & OAS). But if there is a crash I have FI that I can depend on. The GIC ladders give me about 5 years of guaranteed availability of funds that won't have much real growth, but should roughly keep pace with inflation. The bonds are in VAB, and will give more flexibility in spending than the GICs. As time goes by I may switch some of the VAB to VSB or VSC to match the duration of my bonds to my investing timeline.

I used to hold 3 bond funds (VAB, VSB, VSC) to get a custom duration and % corporate bonds (plus the GIC ladders). Then I realized my custom bond ETF blend was just based on wild-@$$ guesses about future returns. So I sold VSB & VSC and reinvested it into VAB. The GICs are my short-term FI holding.

A am comfortable with this, and like to think for a long time before making portfolio changes. Maybe 2 or 3 years into retirement I will rethink if this is the right approach for me. It is tough holding aggregate bond funds like VAB, ZAG, XBB these days, especially looking at possible rate increases. But there is a reason: "Stocks let you eat well. Bonds let you sleep well."

RichMoose

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Re: Bonds for Canadian Investors?
« Reply #16 on: November 02, 2017, 01:28:46 PM »
I'm getting close enough to my FIRE $ target that I am starting to think about the next steps for my investing plan. Currently I am 100% stocks. Before I FIRE I would like to add ~$120K in bonds to my portfolio in my RRSP to mitigate a poor early sequence of returns. $120K is ~3yrs spending with a slight reduction in my COL so I figure that will allow me to weather a crash without depleting my stocks at low valuations. With an easy side-gig I can stretch that $120K out to ~6yrs if I feel the need.

I have no plans to rebalance this part of my portfolio I'll just let the $120K ride and either spend it if there is a crash or let my stocks out run it if there is no crash. Presumably at some point there will be a crash and these bonds will get spent. Assuming by the time the bonds do get spent my portfolio is healthy and past the early sequence of returns risk phase of FIRE I don't plan to replace the spent bonds.

I know very little about bonds and bond ETFs...especially from a Canadian perspective. So I am looking for some suggestions as to what I should specifically be buying to achieve my goals above. If you want to suggest something else like GICs, gold or other safe investments I am open to that if you can make a compelling argument. My keep requirements are 1) investment tool is not likely to be pummelled in a crash when my stocks are 2) can survive inflationary impacts for the first 10yrs of my FIRE and 3) not complex.

What are your thoughts?

It sounds to me like your main goal with bonds is negative correlation to stocks. That can be achieved in two ways: short-term bonds, particularly government bonds and gold.

The best short-term bond ETF available right now is XSB.TO if you're judging by cost. CLF.TO is great for government short-terms so it has a higher potential for negative correlation in a market crash. Personally I would probably just stick to XSB.TO for the lower cost and higher competition in that segment.

Gold, as we all know and is often debated on here, has negative carry costs. CGL-C.TO is probably the best option on the Canadian exchange. But I don't think it should be discounted as a portfolio tool just because of the income issue. It has proven to be an effective hedge to market crashes and inflation.

Regardless, I think a gold allocation should be very limited. Even just one or two years of expenses will do the trick without being a drag on your overall portfolio performance. Using gold as a hedge for sequence of returns risk could actually be even more effective without dragging portfolio returns down in the long term if you don't plan on repurchasing after use. It's hard to model this though, since the gold trust only goes back to 2004. I can't transfer historical spot price data to a modeling tool like Portfolio Charts or Portfolio Visualizer.

An aggregate bond ETF is more risky and does not have the same level of downside protection. Again, the long-term return potential is higher, but to me that's not necessarily what you are looking for. They also won't hold up as well in a rate tightening cycle.

Before getting into a debate on the merits of gold in a portfolio, try run a Monte Carlo simulation like cFIREsim. I think you will find a small allocation bumps up the success rate for early retirees.
« Last Edit: November 02, 2017, 01:41:03 PM by Mr. Rich Moose »

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Re: Bonds for Canadian Investors?
« Reply #17 on: November 02, 2017, 05:40:28 PM »
I would invest in a mixture of floating rate bonds, preferred resets, and GIC's.

We're facing a rising interest rate environment, and the last place I would want to invest for fixed income is in a bond index. GIC = guaranteed 2.50% return whereas a bond index ETF is hoping to do 2.50% net of fees.

Another important consideration is what type of account these are held. Remember that in a RRIF you can purchase a 5 year GIC but withdrawal 100% of it in a year, 2 years, etc. I see this is a big benefit over investing in bonds if your objective is safety during a market correction.

Lews Therin

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Re: Bonds for Canadian Investors?
« Reply #18 on: November 03, 2017, 08:40:47 AM »
On other investment types that have the same effect: Laddered GICs. Each one coming to fruition as it goes along. I thought the use for Bonds was to act counter to stocks when you annual return to AA.

Retire-Canada

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Re: Bonds for Canadian Investors?
« Reply #19 on: November 03, 2017, 08:44:38 AM »
I thought the use for Bonds was to act counter to stocks when you annual return to AA.

I don't understand this ^^ statement. Can you explain it to me?

Lews Therin

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Re: Bonds for Canadian Investors?
« Reply #20 on: November 03, 2017, 09:01:40 AM »
Your 80/20 Stocks and bonds (example) Is in place because when stocks go up (90-10) it means that stocks are now overpriced compared to when you bought them, so you sell 10% to put in bonds. Which have likely gone down (let's say stocks went up 5%, bonds down 5%). This has the effect of selling high, buying low. Bonds are technically a drag on your portfolio, except when used to rebalance.***
*** Which is why someone with 100%-0% stock/bonds after long term does better than someone with bonds.

If your bonds are only used to keep your money for a crappy sequence of return, not for rebalancing, than things like GICs (which are guaranteed, and close to the same rate to cover inflation) would do the same trick, and will not fluctuate.


Retire-Canada

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Re: Bonds for Canadian Investors?
« Reply #21 on: November 03, 2017, 09:23:30 AM »
Your 80/20 Stocks and bonds (example) Is in place because when stocks go up (90-10) it means that stocks are now overpriced compared to when you bought them, so you sell 10% to put in bonds. Which have likely gone down (let's say stocks went up 5%, bonds down 5%). This has the effect of selling high, buying low. Bonds are technically a drag on your portfolio, except when used to rebalance.***
*** Which is why someone with 100%-0% stock/bonds after long term does better than someone with bonds.

If your bonds are only used to keep your money for a crappy sequence of return, not for rebalancing, than things like GICs (which are guaranteed, and close to the same rate to cover inflation) would do the same trick, and will not fluctuate.

Bonds are still a drag on your portfolio in your example above regardless of rebalancing. The idea that rebalancing increases return is specious.

I agree about the GICs and RM's comments about short term bonds. I'm still pondering how I feel about gold and then how I'd implement the portfolio with GICs, short term bonds and possibly gold.

Lews Therin

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Re: Bonds for Canadian Investors?
« Reply #22 on: November 03, 2017, 09:29:06 AM »

Bonds are still a drag on your portfolio in your example above regardless of rebalancing. The idea that rebalancing increases return is specious.

I agree about the GICs and RM's comments about short term bonds. I'm still pondering how I feel about gold and then how I'd implement the portfolio with GICs, short term bonds and possibly gold.

I agree * Should have said, less of a drag when used to rebalance* ;

Retire-Canada

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Re: Bonds for Canadian Investors?
« Reply #23 on: November 03, 2017, 09:31:26 AM »
I agree * Should have said, less of a drag when used to rebalance* ;

Bonds + rebalancing is what causes the portfolio drag. If you were not rebalancing to bonds the drag would be less. Rebalancing doesn't improve your return. It keeps your asset allocation and the related portfolio risk profile consistent with your plans.

Lews Therin

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Re: Bonds for Canadian Investors?
« Reply #24 on: November 03, 2017, 09:37:24 AM »
The rebalancing would increase the amount of stocks that you have when they crash, so you're lows are less low, and highs are less high. It would technically be a long term wash, apart from the fact that the bond returns are not as good as stock returns.

-I feel like we're both arguing the same point, while on the same side.

RichMoose

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Re: Bonds for Canadian Investors?
« Reply #25 on: November 03, 2017, 09:40:53 AM »
Bonds are still a drag on your portfolio in your example above regardless of rebalancing. The idea that rebalancing increases return is specious.

I agree about the GICs and RM's comments about short term bonds. I'm still pondering how I feel about gold and then how I'd implement the portfolio with GICs, short term bonds and possibly gold.
If I'm not mistaken, redeemable GICs held within RRSPs have very low interest rates. Lower than inflation. If you want to do a ladder, such as a 5 year setup, you would need a rather large percentage of your portfolio in GICs to effectively keep you from cashing in stocks. You would also have to roll it over annually until you actually need it.

For this reason, I think short-term bond or gold trust ETFs are better. You can cash them in anytime without limit for a very low cost. The returns on short-term bonds should be higher than inflation pretty much all the time.

As far as implementation goes, how fixed are you when it comes to your retirement date? If there's flexibility there dependent on market returns, why not just stick with an all-stock portfolio and then several months before retirement put away a cash cushion (short-term bonds/gold) as you see fit. With just two years of expenses put away, you can virtually eliminate sequence of returns risk. The average bear market is about 18 months long.

Retire-Canada

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Re: Bonds for Canadian Investors?
« Reply #26 on: November 03, 2017, 09:42:46 AM »
-I feel like we're both arguing the same point, while on the same side.

I am saying rebalancing to bonds means you'll have less money in the long run vs. not rebalancing to bonds and leaving your allocation alone. I agree that more bonds as a % of your portfolio will lower the volatility of your portfolio. That's the trade off for the lower returns.

Is that what you are saying?

FIRE_at_45

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Re: Bonds for Canadian Investors?
« Reply #27 on: November 03, 2017, 09:45:09 AM »
I've read that some just hold some cash.  Of course this is guaranteed to lose to inflation but it won't lose value and have a negative return (aside from inflation). 

I'm enjoying the comments here, thanks for creating this thread.

Retire-Canada

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Re: Bonds for Canadian Investors?
« Reply #28 on: November 03, 2017, 09:47:42 AM »
As far as implementation goes, how fixed are you when it comes to your retirement date? If there's flexibility there dependent on market returns, why not just stick with an all-stock portfolio and then several months before retirement put away a cash cushion (short-term bonds/gold) as you see fit. With just two years of expenses put away, you can virtually eliminate sequence of returns risk. The average bear market is about 18 months long.

I am flexible on the retirement date. Even if I have 2 years of bonds/gold in place if I am still working and there is an epic market crash I would not stop working at that point. It would be nice to sound cavalier and say I would, but I doubt I would have the balls to actually FIRE. OTOH a if it happens a year into my FIRE I might reduce spending and get some PT work to cushion the blow, but I don't see myself hunting for a FT job. So waiting until the last minute to do the swap is reasonable.

Given the fact I will be FIREing on less $$ than I would like [probably 4.5%WR vs. 4%WR] leaving my stocks to grow as long as possible is worth the risk.

Retire-Canada

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Re: Bonds for Canadian Investors?
« Reply #29 on: November 03, 2017, 09:53:51 AM »
I've read that some just hold some cash.  Of course this is guaranteed to lose to inflation but it won't lose value and have a negative return (aside from inflation). 

I'm enjoying the comments here, thanks for creating this thread.

The problem with cash is that over the course of 10yrs [my timeframe of concern for a poor sequence of returns] $120K at 2% inflation would equal ~$100K after 9yrs and if inflation was 4% it would equal ~$83K after 9yrs. That would seriously reduce the potential cushion I'd have to draw on. So I think something that is likely to maintain pace with inflation and not be correlated to stocks during a crash is important.

Thanks to everyone who has replied. I appreciate your input.

Lews Therin

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Re: Bonds for Canadian Investors?
« Reply #30 on: November 03, 2017, 10:13:00 AM »
-I feel like we're both arguing the same point, while on the same side.

I am saying rebalancing to bonds means you'll have less money in the long run vs. not rebalancing to bonds and leaving your allocation alone. I agree that more bonds as a % of your portfolio will lower the volatility of your portfolio. That's the trade off for the lower returns.

Is that what you are saying?

Yes? :D
Allocation could be stock/bond or 100% stock, but I agree that 100% stock will have a better return.

Retire-Canada

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Re: Bonds for Canadian Investors?
« Reply #31 on: November 12, 2017, 08:30:23 AM »
It sounds to me like your main goal with bonds is negative correlation to stocks. That can be achieved in two ways: short-term bonds, particularly government bonds and gold.

The best short-term bond ETF available right now is XSB.TO if you're judging by cost. CLF.TO is great for government short-terms so it has a higher potential for negative correlation in a market crash. Personally I would probably just stick to XSB.TO for the lower cost and higher competition in that segment.

Gold, as we all know and is often debated on here, has negative carry costs. CGL-C.TO is probably the best option on the Canadian exchange. But I don't think it should be discounted as a portfolio tool just because of the income issue. It has proven to be an effective hedge to market crashes and inflation.

Thanks for the replies folks. I'm thinking:

- XSB.TO = $80-$90K [2-3yrs spending]
- CGL-C.TO = $30-$40K [~1yr spending]
- all held in RRSP
- I'll wait until 2019 to convert any funds over.

FIRE_at_45

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Re: Bonds for Canadian Investors?
« Reply #32 on: November 12, 2017, 08:55:12 AM »
It sounds to me like your main goal with bonds is negative correlation to stocks. That can be achieved in two ways: short-term bonds, particularly government bonds and gold.

The best short-term bond ETF available right now is XSB.TO if you're judging by cost. CLF.TO is great for government short-terms so it has a higher potential for negative correlation in a market crash. Personally I would probably just stick to XSB.TO for the lower cost and higher competition in that segment.

Gold, as we all know and is often debated on here, has negative carry costs. CGL-C.TO is probably the best option on the Canadian exchange. But I don't think it should be discounted as a portfolio tool just because of the income issue. It has proven to be an effective hedge to market crashes and inflation.

Thanks for the replies folks. I'm thinking:

- XSB.TO = $80-$90K [2-3yrs spending]
- CGL-C.TO = $30-$40K [~1yr spending]
- all held in RRSP
- I'll wait until 2019 to convert any funds over.

Could you explain your reasoning if you have researched this a bit more?  I have ZAG and I'm reluctant to change anything ever chasing something better. 

Retire-Canada

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Re: Bonds for Canadian Investors?
« Reply #33 on: November 12, 2017, 09:36:49 AM »
Could you explain your reasoning if you have researched this a bit more?  I have ZAG and I'm reluctant to change anything ever chasing something better.

I'm just following RM's recommendations regarding the specific funds. But it seems short term bonds and gold make sense for crash protection.

Looking at 2008 returns:

- VCN = -35%
- VTI = -37%
- VDU = -33%
- VEE = -45%
- XSB.TO = ~+8%
- Gold went from $836 in 2007 to $1420 in 2010


So I figure a combination of short term bonds and gold has the potential to provide a source of fund during a crash so that I can leave my stock allocation to recover. I'm holding a limited amount of them so they won't affect my portfolio performance too much and I don't plan to rebalance them so my stocks will outrun them unless there is an early crash and they'll become less and less of my portfolio as time goes on.

I'll let RM answer the specific question around XSB vs. ZAG. I am not knowledgeable enough to compare/contrast them in any detail and ZAG doesn't have any performance data for 2008. Although a glance at their bond breakdown shows they hold different types of bonds with different durations.

What I will say is you need to define why you are holding your bonds quite specifically and describe your plan for them in detail to come up with an answer.

For example:

- why do you have bonds right now when you have pretty much zero chance you'll withdraw $$ from your portfolio? What do you want them to do for you?
- how much $$ do you have in bonds and the % relative to your stocks?
- do you plan to change this when you FIRE?
- do you plan to rebalance between stocks and bonds to maintain your asset allocation?
- how do you feel about holding bonds with interest rates likely to rise?

Based on the limited information I have about your bond allocation and rationale I don't think we are using them the same way or with the same goal. So the solutions we come up with may well be different.
« Last Edit: November 12, 2017, 09:43:50 AM by Retire-Canada »

FIRE_at_45

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Re: Bonds for Canadian Investors?
« Reply #34 on: November 13, 2017, 09:08:58 AM »
Could you explain your reasoning if you have researched this a bit more?  I have ZAG and I'm reluctant to change anything ever chasing something better.

I'm just following RM's recommendations regarding the specific funds. But it seems short term bonds and gold make sense for crash protection.

Looking at 2008 returns:

- VCN = -35%
- VTI = -37%
- VDU = -33%
- VEE = -45%
- XSB.TO = ~+8%
- Gold went from $836 in 2007 to $1420 in 2010


So I figure a combination of short term bonds and gold has the potential to provide a source of fund during a crash so that I can leave my stock allocation to recover. I'm holding a limited amount of them so they won't affect my portfolio performance too much and I don't plan to rebalance them so my stocks will outrun them unless there is an early crash and they'll become less and less of my portfolio as time goes on.

I'll let RM answer the specific question around XSB vs. ZAG. I am not knowledgeable enough to compare/contrast them in any detail and ZAG doesn't have any performance data for 2008. Although a glance at their bond breakdown shows they hold different types of bonds with different durations.

What I will say is you need to define why you are holding your bonds quite specifically and describe your plan for them in detail to come up with an answer.

For example:

- why do you have bonds right now when you have pretty much zero chance you'll withdraw $$ from your portfolio? What do you want them to do for you?
- how much $$ do you have in bonds and the % relative to your stocks?
- do you plan to change this when you FIRE?
- do you plan to rebalance between stocks and bonds to maintain your asset allocation?
- how do you feel about holding bonds with interest rates likely to rise?

Based on the limited information I have about your bond allocation and rationale I don't think we are using them the same way or with the same goal. So the solutions we come up with may well be different.

I am holding bonds currently based on CCP's recommended portfolios.  Actually at this point I now regret that I've held bonds at all for the last 9 years but hindsight is 20-20.  Does it make sense to dump the bonds now and buy stock?  I am not sure I want to take that risk on a 2 year return into RE. 

As we've discussed a bit in person I am now adjusting my bond portfolio %'s to allow for holding only 3 years of expenses in bonds.  In other words as my portfolio grows I'll continue to have a higher % of stocks versus bonds.  I am ing the process of moving my bond allocation entirely to my RSP portfolio since I'll be pulling everything out as income I think that's best for taxes. 

Based on this plan as my portfolio grows the bond percentage will continue to drop.  I think I would likely just continue to hold that $ amount of bonds throughout retirement and not rebalance.

I would consider changing the bond type if it made sense based on the return and risk rational versus holding ZAG. 

Lews Therin

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Re: Bonds for Canadian Investors?
« Reply #35 on: November 13, 2017, 06:16:58 PM »
For the CCP plan, unlike RC, you have bonds to weaken stock bubble crashes, (by rebalancing) RC is using it to have money in FIRE; you've got bonds for long-term lessening of the crashes

RichMoose

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Re: Bonds for Canadian Investors?
« Reply #36 on: November 13, 2017, 11:01:37 PM »
I would consider changing the bond type if it made sense based on the return and risk rational versus holding ZAG.
It depends on what you are looking for in your bond fund. A short term fund like XSB.TO is ideal as a cash replacement since it provides a return to keep with inflation over the medium term while being the least likely to experience a default (beat by short fed bonds only). Risk is super low and the long term reward is mediocre after inflation.

A mixed fund like ZAG.TO will outperform in the long run in most environments. However it will underperform in a rising rate cycle and is subject to much higher default risk in the event of a financial meltdown.

To sum up, as a long term holding and rebalancing tool, ZAG.TO is arguably better in many ways for a permanent portfolio holding where maximizing returns is the goal. (This raises other questions on the use of bonds at all, but we'll leave that for now). XSB.TO, or CLF.TO is much better for a one-time use failsafe because you can be the most sure your funds will be there, have retained their value in time, and not be subject to a big interest rate swing at that moment. Along with gold its the closest to cash without being cash.

Retire-Canada

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Re: Bonds for Canadian Investors?
« Reply #37 on: November 14, 2017, 06:21:29 AM »
Thanks for the explanation RM.

FIRE_at_45

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Re: Bonds for Canadian Investors?
« Reply #38 on: November 14, 2017, 06:52:44 AM »
It depends on what you are looking for in your bond fund. A short term fund like XSB.TO is ideal as a cash replacement since it provides a return to keep with inflation over the medium term while being the least likely to experience a default (beat by short fed bonds only). Risk is super low and the long term reward is mediocre after inflation.

A mixed fund like ZAG.TO will outperform in the long run in most environments. However it will underperform in a rising rate cycle and is subject to much higher default risk in the event of a financial meltdown.

To sum up, as a long term holding and rebalancing tool, ZAG.TO is arguably better in many ways for a permanent portfolio holding where maximizing returns is the goal. (This raises other questions on the use of bonds at all, but we'll leave that for now). XSB.TO, or CLF.TO is much better for a one-time use failsafe because you can be the most sure your funds will be there, have retained their value in time, and not be subject to a big interest rate swing at that moment. Along with gold its the closest to cash without being cash.

What's with all these smart young dudes!?  Thank you for that explanation. 

I think in the highlighted part you are talking about some of the companies will default but since it's an ETF with a large holding this will have less impact.  It will cause the value to drop though.  Just not like the individual bond I owned that went from $15,000 to nothing :(

I'll have to think about what I want the bonds to do.  I may add a bit of complexity to my bond holding because right now I'm not looking at it to balance my portfolio.  I'm thinking of using it as a tool to weather a crash. 

Retire-Canada

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Re: Bonds for Canadian Investors?
« Reply #39 on: November 14, 2017, 06:57:37 AM »
I'm thinking of using it as a tool to weather a crash.

What do you mean specifically by "weather a crash"?

FIRE_at_45

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Re: Bonds for Canadian Investors?
« Reply #40 on: November 14, 2017, 07:21:33 AM »
What do you mean specifically by "weather a crash"?

If the market crashes like you outlined below I don't want to go to my bonds and have them -10%.  I have not looked at the performance of something similar to ZAG as you pointed out there was no data for it at that time.  Since I'm allowing my bond percentage to drop as my portfolio value increases I'd like to use it more like cash.  But I need to think through it a bit more before making any changes. 

Looking at 2008 returns:

- VCN = -35%
- VTI = -37%
- VDU = -33%
- VEE = -45%

Retire-Canada

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Re: Bonds for Canadian Investors?
« Reply #41 on: November 14, 2017, 07:48:54 AM »
Got it. What % bonds do you currently hold?

RichMoose

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Re: Bonds for Canadian Investors?
« Reply #42 on: November 14, 2017, 08:59:12 AM »
I have not looked at the performance of something similar to ZAG as you pointed out there was no data for it at that time.  Since I'm allowing my bond percentage to drop as my portfolio value increases I'd like to use it more like cash.  But I need to think through it a bit more before making any changes. 

Looking at 2008 returns:

- VCN = -35%
- VTI = -37%
- VDU = -33%
- VEE = -45%

Check XBB.TO and TDB909. Both are comparable. They have both experienced losses near 10%. The pattern is usually that they start to flop at times of trouble, then when the central banks ride to the rescue they pick up again. Part of the whole inverse relationship between rates and bond prices. The longer the bond term, the more pronounced this relationship is.