Author Topic: Canadian Investor - Rethinking my bond allocation  (Read 1126 times)

max9505672

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Canadian Investor - Rethinking my bond allocation
« on: August 16, 2019, 01:47:47 PM »
Hi all,

I've started my accumulation phase about 2.5 years ago, started with a 90/10 stocks/bonds, then switched to 100/0 about 6 months ago.

I am still pretty young, so I thought it would be a good AA%, but I find myself to worry a little too much about market fluctuations and possible market downturn, and I think a slightly lower stock allocation would fit my needs better.

I have a few questions :

1. I remember seeing in the past some statistics / graphs about return over the years vs. AA, but I can't find those any more. Could someone help me with that?

2. Let's say I want to witch to a 80/20 AA, what would be the best way to do it? Should I do it one shot by selling stocks and buying bonds? Should I do it periodically until I reach my AA? As a Canadian investor, should I put the bonds in a RRSP, TFSA or unregistered and why? What bond ETF should I consider?

Thank you,
Max

QyQ

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Re: Canadian Investor - Rethinking my bond allocation
« Reply #1 on: August 16, 2019, 02:36:43 PM »
Following as I am interested in the upcoming answers. Cheers

yow

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Re: Canadian Investor - Rethinking my bond allocation
« Reply #2 on: August 17, 2019, 08:00:05 AM »
My bonds are in my TFSA. It is only 3% or my entire portfolio and I am considering liquidating the position. I hold my bonds in my TFSA. I now hold a bond ETF but held actual bonds in the past which are not that tax efficient to hold in taxable account. When I switched out to an ETF I just left it in my TFSA.

If you are still young and the money you put in is not needed for a considerable amount of time, then if it was me, I wouldn't even bother with bonds. Now that said, I have a higher risk appetite than most and I don't have any money in the market that I need anytime soon.

If you are worried too much about a 100% stock position then no matter how much money it could conceivably make you, its probably not worth it. Did you feel much more comfortable with a 90/10 split? If so, then go back to that. If 80/20 helps you get 8 hours of sleep every night then go with that.

As to how you get to that split; If you want to get back to that balance right away then sell some of your positions in stocks and re-balance as soon as makes sense for you to do it.

if your portfolio isn't that big but are making significant contributions on a regular basis, you could just keep buying bonds until you get to where you want to be. That could take time to get to where you want to be though based on your own personal situation.

There are a lot of Canadians on this board so i'm sure others will chime in with some great information that I have missed here.


max9505672

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Re: Canadian Investor - Rethinking my bond allocation
« Reply #3 on: August 18, 2019, 09:12:53 AM »
If you are still young and the money you put in is not needed for a considerable amount of time, then if it was me, I wouldn't even bother with bonds. Now that said, I have a higher risk appetite than most and I don't have any money in the market that I need anytime soon.

As to how you get to that split; If you want to get back to that balance right away then sell some of your positions in stocks and re-balance as soon as makes sense for you to do it.

if your portfolio isn't that big but are making significant contributions on a regular basis, you could just keep buying bonds until you get to where you want to be. That could take time to get to where you want to be though based on your own personal situation.
Thanks for your input!

I don't plan on needing the money any time soon, so the rational part of me knows it should be OK to keep a 100/0 AA. However, the emotional part of me has a hard time dealing with this.

It would take more than 1 year of only investing in bonds to reach a 80/20 AA, so I feel like that's too long. I will probably sell stock positions once I fully understand where I should invest in bonds, and which products.

Buffaloski Boris

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Re: Canadian Investor - Rethinking my bond allocation
« Reply #4 on: August 18, 2019, 11:04:00 AM »
Not a Canadian, but I will tell you something Iíve noticed: equity valuations are expensive. Not as bad as the US, but no bargain either.

harvestbook

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Re: Canadian Investor - Rethinking my bond allocation
« Reply #5 on: August 18, 2019, 01:15:26 PM »
Not a Canadian, but I will tell you something Iíve noticed: equity valuations are expensive. Not as bad as the US, but no bargain either.

Bonds are pretty expensive right now, too.

Buffaloski Boris

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Re: Canadian Investor - Rethinking my bond allocation
« Reply #6 on: August 18, 2019, 01:23:53 PM »
Not a Canadian, but I will tell you something Iíve noticed: equity valuations are expensive. Not as bad as the US, but no bargain either.

Bonds are pretty expensive right now, too.

I agree. Interest rate risk for very low returns.

max9505672

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Re: Canadian Investor - Rethinking my bond allocation
« Reply #7 on: August 20, 2019, 07:45:13 AM »
Any other inputs please?

Lews Therin

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Re: Canadian Investor - Rethinking my bond allocation
« Reply #8 on: August 20, 2019, 08:34:30 AM »
I have no bonds portion, because that's what my salary does. It rebalances every time I invest. Bonds to me are only useful to reduce variations on returns during FIRE.

FLBiker

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Re: Canadian Investor - Rethinking my bond allocation
« Reply #9 on: August 20, 2019, 08:39:52 AM »
Here's a good article (with a chart about historical returns) on asset allocation: https://www.bogleheads.org/wiki/Asset_allocation
You might also find this helpful: https://www.bogleheads.org/wiki/Three-fund_portfolio

Personally, I do 90/10.  I'm 43, with a wife and daughter, hoping to be FIRE in ~5 years.  That said, I'd be 100/0 if not married -- DW is more risk averse than I am.

As far as how to rebalance, basically you're talking about the difference between lump sum investing and dollar cost averaging.  Based on the data I've seen, lump sum (meaning all at once) is better historically, but of course your individual mileage may vary.  DCA is a good way to overcome anxiety, though, and the differences aren't dramatic.  So I'd say do whichever you're more comfortable with.

And (dunno if it matters) but I'm investing in the US.  I'll be moving to Canada (as a permanent resident) within the next year, though. :)

RichMoose

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Re: Canadian Investor - Rethinking my bond allocation
« Reply #10 on: August 22, 2019, 04:34:50 AM »
Hi all,

I've started my accumulation phase about 2.5 years ago, started with a 90/10 stocks/bonds, then switched to 100/0 about 6 months ago.

I am still pretty young, so I thought it would be a good AA%, but I find myself to worry a little too much about market fluctuations and possible market downturn, and I think a slightly lower stock allocation would fit my needs better.

I have a few questions :

1. I remember seeing in the past some statistics / graphs about return over the years vs. AA, but I can't find those any more. Could someone help me with that?

2. Let's say I want to witch to a 80/20 AA, what would be the best way to do it? Should I do it one shot by selling stocks and buying bonds? Should I do it periodically until I reach my AA? As a Canadian investor, should I put the bonds in a RRSP, TFSA or unregistered and why? What bond ETF should I consider?

Thank you,
Max

Hey Max,

1. This Vanguard link might have what you're looking for about AA vs. historical returns: https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

2. The best place to hold bonds is in your non-registered account if you choose HBB.TO since all returns are converted to capital gains. However, there are some questions about whether or not tax rules will change that would force HBB.TO to pay distributions.
Alternatively, ZDB.TO and BXF.TO are more efficient for taxes than common bond ETFs. You can use these in your non-registered account as well. If you want to stick with a vanilla bond ETF like XBB.TO or VAB.TO, then put it in your RRSP.
If you are buying bonds because you are getting worried and believe your AA is too aggressive for all market conditions, then sell some stock and buy bonds right away. You may lose a bit of money in the short-term, but it could prevent you from making much bigger mistakes in the longer term.
If you are just looking for a gradual shift, put all your new account contributions in bond ETFs until you get to your target allocation.

Hope this helps!

beltim

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Re: Canadian Investor - Rethinking my bond allocation
« Reply #11 on: August 22, 2019, 05:41:47 AM »
Some useful graphs on asset allocation:




There was also a discussion around here a few years ago about the optimal asset allocation to minimize time to FIRE, which varied a lot on savings rate, but I can't find that thread.  Anyone remember the one I'm talking about?


scottish

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Re: Canadian Investor - Rethinking my bond allocation
« Reply #12 on: August 24, 2019, 03:35:13 PM »
I keep my bonds in my RRSP.   That way the interest payments are tax sheltered.   Since I have lots of room in the RRSP to hold the fixed income part of the portfolio, I use the TFSA for high growth ETFs, i.e.  the S&P 500.

My reasoning is that growth in the RRSP will be taxed as income eventually, and growth in the TFSA is not taxed at all.    So I want more growth in the TFSA if possible to reduce my tax burden when I start drawing down the portfolio.

max9505672

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Re: Canadian Investor - Rethinking my bond allocation
« Reply #13 on: August 26, 2019, 01:40:16 PM »
I have no bonds portion, because that's what my salary does. It rebalances every time I invest. Bonds to me are only useful to reduce variations on returns during FIRE.
I understand how you use bonds without income. I also re-balance everytime I invest to meet my AA% (world distribution). In case of a significant downturn, having some bonds would help rebalancing and counter weighting the losses more quickly, no? I guess it comes down to market timing then, and when to sell your bonds to buy stocks, when to comeback to your target AA% vs. sticking with your AA%.


Here's a good article (with a chart about historical returns) on asset allocation: https://www.bogleheads.org/wiki/Asset_allocation
You might also find this helpful: https://www.bogleheads.org/wiki/Three-fund_portfolio

Personally, I do 90/10.  I'm 43, with a wife and daughter, hoping to be FIRE in ~5 years.  That said, I'd be 100/0 if not married -- DW is more risk averse than I am.

As far as how to rebalance, basically you're talking about the difference between lump sum investing and dollar cost averaging.  Based on the data I've seen, lump sum (meaning all at once) is better historically, but of course your individual mileage may vary.  DCA is a good way to overcome anxiety, though, and the differences aren't dramatic.  So I'd say do whichever you're more comfortable with.

And (dunno if it matters) but I'm investing in the US.  I'll be moving to Canada (as a permanent resident) within the next year, though. :)
Thanks for the great information and input. You are right, it comes down to lump sum vs. DCA. When I began investing in ETF's about 2.5 years ago, I did lump sum investing after ready a lot on the subject. Would only make sense to do the same here.

Hey Max,

1. This Vanguard link might have what you're looking for about AA vs. historical returns: https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

2. The best place to hold bonds is in your non-registered account if you choose HBB.TO since all returns are converted to capital gains. However, there are some questions about whether or not tax rules will change that would force HBB.TO to pay distributions.
Alternatively, ZDB.TO and BXF.TO are more efficient for taxes than common bond ETFs. You can use these in your non-registered account as well. If you want to stick with a vanilla bond ETF like XBB.TO or VAB.TO, then put it in your RRSP.
If you are buying bonds because you are getting worried and believe your AA is too aggressive for all market conditions, then sell some stock and buy bonds right away. You may lose a bit of money in the short-term, but it could prevent you from making much bigger mistakes in the longer term.
If you are just looking for a gradual shift, put all your new account contributions in bond ETFs until you get to your target allocation.

Hope this helps!
Hey RichMoose, yes, this is exactly the kind of data I was looking for. Historical data clearly a advantage of having 100% stocks in the long run vs. bigger short term variations... I find it hard to make a decision ahah. As I said, the logical part of me tells me to keep my 100/0 AA but the emotional part is getting worried. I should probably stick to the long term plan though..

Thanks for the input on taxable vs. RRSP vs. TFSA accounts.

There was also a discussion around here a few years ago about the optimal asset allocation to minimize time to FIRE, which varied a lot on savings rate, but I can't find that thread.  Anyone remember the one I'm talking about?
That would be interesting to read! To you remember the big lines of the conclusions?


beltim

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Re: Canadian Investor - Rethinking my bond allocation
« Reply #14 on: August 27, 2019, 01:10:42 AM »
There was also a discussion around here a few years ago about the optimal asset allocation to minimize time to FIRE, which varied a lot on savings rate, but I can't find that thread.  Anyone remember the one I'm talking about?
That would be interesting to read! To you remember the big lines of the conclusions?

The interesting one that I remember was that the average time to FIRE was lower with a portfolio that included bonds.  The shortest time to FIRE was a 100% stocks portfolio, but so was the slowest portfolio.  Basically, having bonds in the accumulation phase reduced the average time to FIRE due to sequence of returns factors. 

max9505672

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Re: Canadian Investor - Rethinking my bond allocation
« Reply #15 on: August 27, 2019, 11:26:12 AM »
There was also a discussion around here a few years ago about the optimal asset allocation to minimize time to FIRE, which varied a lot on savings rate, but I can't find that thread.  Anyone remember the one I'm talking about?
That would be interesting to read! To you remember the big lines of the conclusions?

The interesting one that I remember was that the average time to FIRE was lower with a portfolio that included bonds.  The shortest time to FIRE was a 100% stocks portfolio, but so was the slowest portfolio.  Basically, having bonds in the accumulation phase reduced the average time to FIRE due to sequence of returns factors.
Seems to make sense, in average.

Lews Therin

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Re: Canadian Investor - Rethinking my bond allocation
« Reply #16 on: August 27, 2019, 06:34:24 PM »
I have no bonds portion, because that's what my salary does. It rebalances every time I invest. Bonds to me are only useful to reduce variations on returns during FIRE.
I understand how you use bonds without income. I also re-balance everytime I invest to meet my AA% (world distribution). In case of a significant downturn, having some bonds would help rebalancing and counter weighting the losses more quickly, no? I guess it comes down to market timing then, and when to sell your bonds to buy stocks, when to comeback to your target AA% vs. sticking with your AA%.

It's kinda like market timing, but in the sense that you are simply pocketing profits, and making sure you sell high and buy low. You are losing upside, but gaining with less downside. Depending on the time frame, it can be more or less optimal than 100% stocks.

In retirement, it lowers the chance of sequence of return risk.