Author Topic: Get rid of mortgage AND bonds  (Read 5556 times)

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1050
  • Age: 47
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Get rid of mortgage AND bonds
« on: October 07, 2014, 12:59:44 PM »
Rethinking my assets allocation...

In a previous post, I asked you Mustachian about using HELOC for investing in equity ETF (see my "Borrow to invest ?" post)

My actual portfolio is 26%VSB (short Gov. Bonds), 21% ZCN (Canadian market), 9% ZRE (Canadian REITs), 22%VTI and 22% VXUS. The "bonds" represents 125K$ and my mortgage is 95K$ at 3.5% with 5 years to be repaid.

Some of you make me realize my bonds will probably just match the HELOC I was about to use (2.0% after taxes refund). My total portfolio would be bigger but so would be the debt...

Then, I reconsidered my A.A. and the result looks like this: 30%ZCN, 30% VTI, 10% VBR (small-value exposure) and 30% VXUS.

Volatility will probably increase, average MER drops from 0.15% to 0.06% (higher MER in Canada) and returns could be around 1% more on the long haul, 25 years +.

I know I can handle a lot of volatility, I remember myself thinking I was "buying low" during 2002 and 2008 meltdowns.

What do you think?


Kaspian

  • Handlebar Stache
  • *****
  • Posts: 1536
  • Location: Canada
    • My Necronomicon of Badassity
Re: Get rid of mortgage AND bonds
« Reply #1 on: October 07, 2014, 02:24:31 PM »
I think your allocation is more or less fine.  Didn't you notice in 2011 when bonds returned 10% and equities returned negatives?  Hey, I don't think I'm smarter than John Bogle  and if he says 30-40% bonds is a decent long-term position, I'll listen.

BaldingStoic

  • 5 O'Clock Shadow
  • *
  • Posts: 84
Re: Get rid of mortgage AND bonds
« Reply #2 on: October 07, 2014, 02:27:45 PM »
Personally, I started cashing in some of bond funds to pay down my mortgage (3.75%).  After the tax deduction the interest rates are roughly equivalent and I like to peace-of-mind of lower debt / higher home equity. 

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1050
  • Age: 47
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Get rid of mortgage AND bonds
« Reply #3 on: October 07, 2014, 02:45:13 PM »
Virtus, I can't sell the bonds to repay the mortgage because they're in tax sheltered accounts. That's why I think to replace them with equities inside the accounts.

Kaspian, I understand this but you can't always win. Since 2007, mortgage rates went so low that my house increased by 50%. Normaly, it's supose to keep up with inflation. On the long haul, equities will beat everything else.

Roland of Gilead

  • Handlebar Stache
  • *****
  • Posts: 1959
Re: Get rid of mortgage AND bonds
« Reply #4 on: October 07, 2014, 02:57:17 PM »
I think your allocation is more or less fine.  Didn't you notice in 2011 when bonds returned 10% and equities returned negatives?  Hey, I don't think I'm smarter than John Bogle  and if he says 30-40% bonds is a decent long-term position, I'll listen.

Currently it is not even possible for short term bonds to return 10% in a year.  For a short term bond paying 2%, current bond rates would need to go negative for the price of the former bond to gain 10%.

Hey, I will pay you $1000 to hold this $100,000 for me for a few years.

RichMoose

  • Pencil Stache
  • ****
  • Posts: 969
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Get rid of mortgage AND bonds
« Reply #5 on: October 07, 2014, 03:02:56 PM »
How far away are you from retirement? I think you should give that some consideration. In retirement, you should hold bonds/money market because you don't want to be selling your stocks in a recession. If you retire with an FI score of exactly 25, counting on 4% SWR, that means you "should" hold a minimum of 15% - 20% bonds because that would be 4-5 years of expenses.

I do like your idea of dumping ZRE. How about allocating that ~10% to VEE.TO instead of VBR?

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1050
  • Age: 47
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Get rid of mortgage AND bonds
« Reply #6 on: October 07, 2014, 03:15:36 PM »
TuxedoEagle, my goal is FI within 5-10 years. I'm 42 now so if I screw up with investments, I just have to work a bit more or part time. Dont forget that a Mustachian can live with only a few buck a day with house repaid !

I did own VWO combined with VEA but replaced both of them with VXUS. Everything could be sliced and diced. My portfolio could be 20%ZCN, 20%VTI, 20%VBR, 20%VEA and 20%VWO. As long as I keep good diversification (world, cap, sector) I'll be fine

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1050
  • Age: 47
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Get rid of mortgage AND bonds
« Reply #7 on: October 07, 2014, 03:17:31 PM »
Hey, I will pay you $1000 to hold this $100,000 for me for a few years.

Not sure what you meant...

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8897
  • Registered member
Re: Get rid of mortgage AND bonds
« Reply #8 on: October 08, 2014, 10:12:11 PM »
Hey, I will pay you $1000 to hold this $100,000 for me for a few years.

Not sure what you meant...

the implication of negative interest rates

ScroogeMcDutch

  • 5 O'Clock Shadow
  • *
  • Posts: 86
Re: Get rid of mortgage AND bonds
« Reply #9 on: October 09, 2014, 05:45:24 AM »
Negative interest rates as they exist in Germany for large corporations (https://mninews.marketnews.com/index.php/some-german-banks-now-demand-charges-deposits-press?q=content/some-german-banks-now-demand-charges-deposits-press) and the ECB also charges money to banks to store money in short term deposits.

Negative interest isn't impossible, it's just not desirable and in an inflationary based economy such as ours it is also something we're not used to thinking about.

RichMoose

  • Pencil Stache
  • ****
  • Posts: 969
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Get rid of mortgage AND bonds
« Reply #10 on: October 09, 2014, 09:56:05 AM »
As I understand it, the German Central Bank (Bundesbank) has been paying negative real interest rates on their bonds for a while now. I guess European investors are okay with losing money, as long as its lost slowly and surely. :)

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1050
  • Age: 47
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Get rid of mortgage AND bonds
« Reply #11 on: October 09, 2014, 09:59:05 AM »
if you can't stop digging nor jump of the hole you're in, you better dig slowly for sure ;-)

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8897
  • Registered member
Re: Get rid of mortgage AND bonds
« Reply #12 on: October 09, 2014, 10:45:04 AM »
As I understand it, the German Central Bank (Bundesbank) has been paying negative real interest rates on their bonds for a while now. I guess European investors are okay with losing money, as long as its lost slowly and surely. :)

negative real rates are a different animal -- people are way more fine with losing to inflation as long as nominal keeps going up.  When nominal starts going down, people freak out.