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Hello All,

I am an investor who just started investing in march of this year and still learning the ropes. I learned about asset allocation recently and I think I have hammered down an asset allocation that I am content with. I was thinking of going with a 30% bond index fund allocation. I was considering getting something like XBB or XSB. As of right now I have no bonds in my portfolio at all.

The one thing I wanted some feedback on is buying index bonds at this current time. When I was doing research on bonds I kept hearing that bonds are inversely proportional to interest rates. When Interest rates go down then prices for bond indexes go up and vice versa. With that being said are bond index prices higher now than they were before? Also, should I wait till covid is done and then load up on bond indexes?

Any feedback would be appreciated.
 

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The big question is your time horizon. How long do you think it will be before you need to withdraw or liquidate from this portfolio?

There is no point trying to time the bond market. We don't know if interest rates will go up or down from here, and we can't predict the performance of bond ETFs. The only thing you really should decide based on, is your time horizion.

If your time horizon is 20+ years, then just as you invest in stocks for the long term, you should invest in XBB for the long term. It MAY be volatile in shorter periods -- just like stocks -- but in the long term, XBB is guaranteed to provide a higher return than cash or XSB.
 

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Bond funds could go down in price, so could stocks. The best an investor could do is to set a reasonable asset allocation and stick to it. Every year, it is almost certain that one of the two (stocks or bonds) will underperform. All you need to do is rebalance into the underperformer. Stocks go down, you sell bonds and buy stocks. Bonds go down, you sell stocks and buy bonds.
 

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Bonds are offering nearly a zero return, what’s the attraction? You need at least 4% before taxes jut to break even with inflation. Right now bonds are a safe way to lose money.
 

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Bonds are offering nearly a zero return, what’s the attraction? You need at least 4% before taxes jut to break even with inflation. Right now bonds are a safe way to lose money.
The attraction is that they don't crash 50% to 80% every few years, and that a portfolio which includes bonds is more stable and easier to stick with. People who forego bonds and invest purely in stocks tend to freak out in bad markets and catastrophes (like COVID).

You said that bonds are a safe way to lose money. Well, capitulating during a stock crash is an even better way to lose (a lot more) money.

I realize that you are super-human, Just a Guy, and never freak out about stocks. But many investors do. For many people, being purely in equities can be a very unnerving experience.
 

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There are two issues here. Firstly, the OP doesn't indicate age, or years until some stability may be desired in the portfolio, and secondly, the OP's ability to truly handle the volatility associated with a high equity portfolio. Equities return more because of risk, i.e. the equity risk premium. I might perhaps suggest a fixed (absolute sum) of fixed income rather than an asset allocation percentage, which can serve as both an emergency fund and ballast for the portfolio.

That said, XBB has had a big run the past few years due to the decline in the bond yield curve over that period. It is up some 10% over that 2 year period, albeit not nearly that much over a 5 year period (as in 2016 when the bond yield curve was also depressed). I would be loathe to buy either of XBB or XSB at this time due to XSB also reacting similarly and in fact XSB may be more volatile because of the short term effect of Bank of Canada yanking short term interest rates around. There really isn't much an investor can do with their FI allocation.....except maybe play the waiting game for a year or two and in the meantime put the FI component in a HISA from one of the firms noted at Comparison chart
 

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Bonds are offering nearly a zero return, what’s the attraction?
You buy bonds for preservation of capital. The meager spread between bond return and inflation is insignificant compared to stock market loses. When the market is down, the investor doesn't want to sell their stocks to fund their living expenses. The smart investor has bonds to provide income during those times.

Just a Guy, you should do some research on asset allocation and it's purpose.

ltr
 

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James getting a negative return guaranteed during the good times Doesn’t justify getting a smaller negative return in bad times. Covid is an excellent time to get into stocks, been making double digit returns since March. Sure some people lost money leading up to it, some of my stocks went down too (of course most of those stocks were bought during the 2007/8 crash or similar and paid me back just in dividends so the stocks and future income is pure profits), but most have recovered and the new ones are making me a small fortune. How did bonds do in comparison? They lost you money before and after Covid. Good deal.

iltr,

I buy real estate to preserve capital, the bonus is, I don’t even use my own money to do it. Bonds are for fools who buy into the talking heads, most of which make their money by giving bad advice, not through bonds. Maybe you should do some research on basic math and negative returns.
 

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Covid is an excellent time to get into stocks, been making double digit returns since March.
But where does a retiree get the money to buy at March lows if they don't have any fixed income? Wouldn't it be great to buy in the crash?

Dividends don't count because they are coming out of stock returns.
 

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Where do they get the money to buy bonds instead? Dividends don’t count? It’s money that comes to the holder, bonds don’t offer something similar.
 

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Where do they get the money to buy bonds instead? Dividends don’t count? It’s money that comes to the holder, bonds don’t offer something similar.
The dividends come out of stocks, knocking down the share price, equivalent to selling some shares. When you reinvest the dividend you're back to where you started. This is not a NET increase in the equity position so you have not "bought low". You've maintained the existing equity position.

Similarly, if you transferred those dividends out of your account, you are making a net withdrawal from your equities (same as selling some). Dividends are not free money.
 

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I buy real estate to preserve capital, the bonus is, I don’t even use my own money to do it. Bonds are for fools
Yeah, real estate can be quite volatile and doesn't usually lend itself to small sales that fund cash flow for groceries.

The massive bond market and I will pass on your childish bonds comment.

ltr
 

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Keep losing money and telling yourself how good you are doing. I’ll keep growing my net worth and passive income each month. It’s your choice after all. Your rift real estate doesn’t encourage selling your cash making investment, when you sell off your losing money bonds, how much money do they make you then? As opposed to say monthly rental income. To buy those money losing bonds, cost you after tax dollars, as opposed to real estate which is paid with opm. Keep lying to yourself though, it will make you rich, afterall when you go below zero the scale wraps around to billions right?
 

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The dividends come out of stocks, knocking down the share price, equivalent to selling some shares. When you reinvest the dividend you're back to where you started. This is not a NET increase in the equity position so you have not "bought low". You've maintained the existing equity position.

Similarly, if you transferred those dividends out of your account, you are making a net withdrawal from your equities (same as selling some). Dividends are not free money.
you do watch the market right? What you say is technically correct, in reality, stocks rarely decrease by their dividends in reality. The market doesn’t react rationally.
 

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you do watch the market right? What you say is technically correct, in reality, stocks rarely decrease by their dividends in reality. The market doesn’t react rationally.
If this were true, why not borrow a ton of money and buy dividend stocks immediately before ex dividend day, sell them after? It would be free money.
 

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Not my style of investing, if bonds which guarantees you loose money are such a good investment why don’t you go all in and retire?
 

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For what it's worth, @Juggernaut92 you might want to take a look at GICs vs. Bond ETFs: A Case Study and Bold Adventure – Canadian Portfolio Manager Blog which considers the option of using GICs instead of Bonds fund.

It ends with:

Key Takeaway #3. When the YTM of a GIC ladder is similar to or higher than the YTM of a bond ETF, it can be a decent alternative for a short-term or a broad-market bond ETF.
A quick comparison right at this moment:
Full disclosure: I am in the process of simplifying my portfolio and along the way decided to replace the bond funds entirely with a HISA/GIC mix.

Good luck!
JC
 

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HISA rates continue to move down. Could be a range of 1.2-1.5% by end of 2020....or worse, or not. That may well be the short term 1-3 year answer for now. We will only know in hindsight.

Added: For myself, I am sticking with my 5 year GIC ladder. I have no track record in forecasting interest rates.
 
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