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.