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Discussion Starter #1 (Edited)
Just throwing this out there for comment. I realize that this is not a "one size fits all" type of question so I'm just looking for individual opinion and comment from your own perspective. It's just that with, cash paying about 1% or less, GICs paying a maximum rate of somewhere around 3.5% (for 5 years), RRBs around 2.5%, longer term bonds somewhere around 5% and the potential for inflation -- are these products necessarily the "safe-haven" that we're often lead to believe? There is a massive amount of money in these products at the time being. Is this a bubble of sorts? Would it actually be safer to allocate the less risky portion of your portfolio in a fairly low volatility, stable dividend stock such as TRP or ENB? Where are you putting your "more safe" money?
 

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It is my opinion that the bond market is usually right and not the stock market. Everyone is betting on risk or commodities and believe inflation is a slam dunk and the US dollar can only go down. Look at the possible default coming from Dubia World and how it caused problems, everything is not as it seems.
 

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Lately this seems to be a common lament. If we look at very long run rates of return -- I'm thinking 200 yrs. worth -- then we see that bonds have returned around 4.5%-5% on ave. and equities around 7%. From that perspective, current rates of return for fixed income while low, aren't really outside of the long run range.

Our problems seem to be a result of anchoring our expectations in the past 30 years or so with an expectation that debt "should" return something in the order of 7.5%-9%+. Maybe we just have to get used to the idea that the current rates of return are the new/old normal rather than what we have come to expect in the aftermath of a highly inflationary period. From that perspective, it's pretty clear that debt isn't necessarily in a bubble, but more likely that investors are willing to pay a very high price for certainty when so much is uncertain (despite the machinations of the stock market).

The truth that you don't want to hear is that we really must get used to the idea of reduced expectations. The bond market is foretelling this.

There's plenty of column width these days professing the advantages of dividends and suggesting that they may make a suitable substitute for low interest rates, but that couldn't really be further from the truth as there is considerable risk being assumed in exchange for the attractive yields. Isn't this what got us into this mess in the first place; reaching for yield?

In terms of where to put "safe money", the easy answer is to use it for debt reduction. The return is guaranteed and the payback will be greatly reduced carrying costs down the road should interest rates move up unexpectedly. After that, keep a portion in liquid cash savings and then look to lock in improved rates with a short term bond/GIC ladder. You shouldn't be concerned about the return as that will look after itself. The greater issue is risk control and safety, so stick to highly rated issues and keep maturities short.
 

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Discussion Starter #4 (Edited)
After that, keep a portion in liquid cash savings and then look to lock in improved rates with a short term bond/GIC ladder.

That's generally been the approach I've been taking, but it is a balancing act. If you allocate too little to safe investments you will risk being burnt in the event of a further market crash and perhaps even more importantly, as I found out during the last crash, be burnt by running short of available cash to invest when stocks are "on sale". However, if you over allocate to this category, then you risk seriously damaging your long-term returns and as an extension the quality of your lifestyle.

The question came up as a result of listening to an investment show where the guest figured that many people were making a serious mistake by placing so much money in bonds at a time when interest rates are the lowest they've been in decades. I realize that short-term products will be less effected by an interest rate spike, but they will still be effected (especially money locked in for 5 years). He figured that high quality dividend utility stocks are actually currently a safer bet than interest investments. I realize that these products are also interest-rate sensitive, but at least they have the option to raise their rates and by extension their dividends in periods of high inflation. I'm still mulling it over, and that is the reason I'm throwing it out there for comment, but what he says seems to make a certain amount of sense.
 

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Just throwing this out there for comment. I realize that this is not a "one size fits all" type of question so I'm just looking for individual opinion and comment from your own perspective. It's just that with, cash paying about 1% or less, GICs paying a maximum rate of somewhere around 3.5% (for 5 years), RRBs around 2.5%, longer term bonds somewhere around 5% and the potential for inflation -- are these products necessarily the "safe-haven" that we're often lead to believe? There is a massive amount of money in these products at the time being. Is this a bubble of sorts? Would it actually be safer to allocate the less risky portion of your portfolio in a fairly low volatility, stable dividend stock such as TRP or ENB? Where are you putting your "more safe" money?
I'm keeping my safe money in XSB and cash. My cash levels were lower than my target of 5% (for personal reasons) as we entered the 2008 crash and as a result I could only invest new savings. The biggest lesson I learnt from the crash is to keep some cash around. Fortunately, I did hold 20% in XSB and as a result rebalanced into equities. With the market rally, I rebalanced again out of equities. This is simply managing risk and I fully realize that rebalancing may not always be profitable but that's the way it is.

I see no reason to change the plan now. Yes, bond yields are low and cash yields nothing but the bond market is pricing in low inflation. If inflation turns out to be low, the real yields we get from bonds today is close to historical averages.
 

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I think the only thing anyone can say with true confidence is that we have no idea what the future will bring. Could you imagine if someone asked to you to predict what the weather will be on June 24th, 2019? Trying to predict future inflation, stock market behavior, bond prices, etc. is similarly impossible.

So the best bet is to spread your risks and keep your eggs in multiple baskets...some money in stocks, some in GICs, some in bonds, some in real estate, whatever.
 

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The question came up as a result of listening to an investment show where the guest figured that many people were making a serious mistake by placing so much money in bonds at a time when interest rates are the lowest they've been in decades. I realize that short-term products will be less effected by an interest rate spike, but they will still be effected (especially money locked in for 5 years). He figured that high quality dividend utility stocks are actually currently a safer bet than interest investments.
There are a lot (and I mean a lot) of talking heads on radio and TV these days touting the benefits and attraction of dividend investing, hoping to catch folks like you to re-think their investing strategy.
Just the other day, an "expert" from CIBC World Markets was going on and on the same topic on 680 Business News.
In almost all cases, these guys work for (or are somehow compensated by) mutual fund companies or the investing arm of major banks.

What these guys are trying to do is get people who liquidated their mutual funds to jump back into the market.
Not that there's anything wrong with a dividend investing strategy, but don't do it just because these guys are raving about it.
They get a commission out of it - we don't.
 

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I see no reason to change the plan now.
Amen!

I hold bonds and cash because they allow for asset diversification. They aren't in my portfolio to produce stellar returns, just provide the protection against big portfolio declines.

Yes, bond yields are low and cash yields nothing but the bond market is pricing in low inflation. If inflation turns out to be low, the real yields we get from bonds today is close to historical averages.
This is another great point. As long as inflation remains low, then yields are fine where they are (just as long as you stay with short term products). Although no one can predict where bond prices and yields will go, I predict holding long-term bonds now is a bad idea. :p
 
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