Canadian Money Forum banner

21 - 40 of 70 Posts

·
Registered
Joined
·
7,004 Posts
You guys can have your single digit returns or guaranteed negative returns if it makes you sleep better at night, I’ll stick with my passive income approach and get high double digit returns. There are sheep who are easily led to slaughter and the Shepard’s who make the money.

by the way, asset allocation was developed when bonds made an actual return...times changed several decades ago, Glad to see you’re keeping up with reality. If not maybe you can pick up some Nortel, Enron, BreX, or world com.
 

·
Registered
Joined
·
10,365 Posts
I need to find an emoji of someone playing the violin....

Added: Getting back to the OP's original query, I think the best way to characterize it is... how to provide some stability and security (ballast) to the equity portion of the portfolio given where interest rates are today. There is no easy answer EXCEPT to look at it for the very long term. If the OP was investing in one of the Asset Allocation ETFs, the decision would have already been made for him.
 

·
Registered
Joined
·
36 Posts
Discussion Starter #24
@james4beach : Hmm the thing is that I do want to put a down payment for myself ready soon but at the same time I do want to invest a bit too. I think where I landed on is I am going to put at least around $1000-$2000 into fixed income for now and may withdraw it at the time of the downpayment but more likely I may just keep holding it till retirement which is quite a while away (+30 years). That is a good point. Most people say timing the market is a bad idea. Yes I was leaning more toward XBB.

@Topo : Yes for sure. That is why I wanted to get started on my fixed income portion of my portfolio as I currently have nothing in there but once I get it started I was thinking I can look at the 2 at year end and rebalance appropriately.

@Just a Guy : Bonds dont offer great returns but they do not offer great losses either from what I read up on. Also, what about the distributions of bonds? That is a way of getting returns? I am up for looking at it from a different point of view if you have one. Would you say you are more into stocks because you are younger?

@AltaRed : Good point. I am 28. In most cases I am calmer than a hindu cow but I must admit that when it comes to stocks I am like others and don't like seeing too much red in my account. i do have the knowledge that over time the stock market does tend to go up but for now I would like some fixed income in my portfolio. I just started investing recently and am trying to follow a recommended asset allocation for now. Next year I will assess the situation. i know some investors go more aggressive (all equities) around my age and then eventually just get into bonds when they are older. Yes the HISA is a good option as well and am considering that too.

@john.cray : This is very interesting. Thanks for pointing it out. I will go through the links and read more about it.

@agent99 : Interesting. It looks quite dry and technical but I will give it a read.
 

·
Registered
Joined
·
36 Posts
Discussion Starter #25
One more thing I never understood is this:


The following link is the XBB info page. There is a chart showing the hypothetical growth of 10k. It says from 2001 to now your 10k would amount to 27.8k right now. However, when I google XBB and look at the price chart from the earliest date till now it shows only an increase of 18%. Did the black rock info page get the growth 27.8k with the reinvestment of dividends?
 

·
Registered
Joined
·
397 Posts
Yahoo, Google Finance charts don't account for distributions (dividends/interests, etc).
Take a look at this chart and you can see a clear distinction of the return.
 

·
Registered
Joined
·
7,004 Posts
I’m not that young, but I want to make money. when I started investing I needed to replace our family income because my wife and I were both injured and couldn’t work for several years. Even when we could, we were limited by chronic pain. Sure bonds don’t go down much, but that’s because they’re nearly zero to begin with. Asset allocation is an old investing technique developed when bonds yielded closer to 8-10%. Its now a dinosaur technique along with buy a diversified portfolio of mutual funds, as if mutual funds are diversified or a good investment. I’m diversified, I own companies, real estate and Stocks. I’ve weathered many a downturn as they tend to occur Every 10 years. How to I get past the red days? Pretty simple I don’t look at stock returns very often. Having started in real estate I have a 10 year outlook on investing and it’s served me well. I look once or twice a year typically, but then I trust my systems and don’t buy risky stuff.
 

·
Registered
Joined
·
36 Posts
Discussion Starter #28
@john.cray : Thanks for pointing that out and that link looks quite handy. I will try it out with a few stocks I am interested in.

@Just a Guy : That is an interesting point you make. You are saying at one point bonds made 8-10% a year (capital gain +distribution)? I avoid mutual fund because of the MER and have already heard from many people that an ETF is much better. Would you say that you try and pick really strong stocks? something like bank stocks (TD, BMO or BNS) that dont cut dividends during a recession? I only ask because people who pick stocks can get hit during a down time like this with some companies cutting their dividends. Isn't that where bonds come in to ensure you have some money still coming in? That makes sense that you would not worry too much about bonds if you already have other avenues of money coming in. Do you invest in individual stocks or ETFs?
 

·
Registered
Joined
·
3,383 Posts
I only ask because people who pick stocks can get hit during a down time like this with some companies cutting their dividends. Isn't that where bonds come in to ensure you have some money still coming in?
Most fixed income like bonds and GICs presently have lower yields than the inflation rate. The real yield is the quoted yield less the inflation rate. So a GIC yielding 1.5% when inflation is 2% actually yields -0.5%. So don't count on bonds to ensure you have money coming in!

The only real use of those low interest fixed income products, is to maintain capital during bad times on equity markets. When young, you might choose an amount equal to 6 months or a couple of years living expenses. Whatever gives you a feeling of comfort.

At your stage, you might consider just buying a balanced ETF. I don't personally buy ETFs unless I can't think of anything better. But balanced funds can be useful - I used them when too busy at work to think about our investments.
This might help: Best all-in-one ETFs for 2020 | MoneySense
 

·
Registered
Joined
·
7,004 Posts
I personallly have been picking my own stocks for years...usually every10 years o Sligo on a buying spree when there is some crisis (covid this year, the collapse in 2007/8, the dot bomb of 1999/2000, black monday, when the government changed the tax on income trusts, etc. I pick companies I know and understand and buy them when they are on sale. Some pay dividends, some don’t. They all make me money. I’ve made enough that I could margin the account to access the funds if needed or buy other stuff and get each dollar earning as if it was two dollars.

if bonds don’t make money, what kind of income would they generate?

by the way, yes my stocks have gone down between crisis, but they’ve never gone down as far as the first crisis wherei bought them. Plus the dividends have grown since then as well. For example I bought bmo in 2008 for $28, it paid $2.80 in a dividend (10% on my investment) in 2019, by the time covid hit, all my money was paid back by the dividend Alone. Bmo increased the dividend to almost 15% of my purchase price and the stock was up 300%. Sure it’s gone down during covid, But the low was 55, so I was still up 100% on my purchase price, and artillery getting about 15% dividends. Compare that to any bond over the same period and you wont find anything. Oh, and the stock is currently trading at $81. Oh the sleepless nights I’ve had. Thinking of all the fools who bought ”safe” bonds and who I’m going to have to support in old age.
 

·
Registered
Joined
·
17,631 Posts
Most fixed income like bonds and GICs presently have lower yields than the inflation rate. The real yield is the quoted yield less the inflation rate. So a GIC yielding 1.5% when inflation is 2% actually yields -0.5%. So don't count on bonds to ensure you have money coming in!
Inflation right now is 0.1% and the latest reading will come out on Wednesday.

Today: GIC for 1.2% yield and inflation is 0.1%. Real yield = 1.1%
Year ago: GIC for 2.37% yield and inflation was 2%. Real yield = 0.4%

The inflation rate is important. Most people would guess that the 1.2% yield today is a worse deal, but if the current inflation value persists, this is actually a higher return than the GIC that I bought a year ago.

Don't assume that fixed income is a bad deal just because the number looks low.
 

·
Registered
Joined
·
996 Posts
Inflation right now is 0.1% and the latest reading will come out on Wednesday.

Today: GIC for 1.2% yield and inflation is 0.1%. Real yield = 1.1%
Year ago: GIC for 2.37% yield and inflation was 2%. Real yield = 0.4%

The inflation rate is important. Most people would guess that the 1.2% yield today is a worse deal, but if the current inflation value persists, this is actually a higher return than the GIC that I bought a year ago.

Don't assume that fixed income is a bad deal just because the number looks low.
That is a very important point. It particularly rings true on an after-tax basis. For someone in the 50% tax bracket, the GIC yield today still offers a projected +0.6% after tax real yield, while the GIC a year ago had a -0.8% after tax real yield.
 

·
Registered
Joined
·
3,107 Posts
I know it's probably not the accepted rule, but I would rather a 4% bond with 4% inflation than a 1% bond with 1% inflation.

The 4% bond at least gives something to work with. My personal inflation rate may not be 4%, it may be much less.

ltr
 

·
Registered
Joined
·
17,631 Posts
I know it's probably not the accepted rule, but I would rather a 4% bond with 4% inflation than a 1% bond with 1% inflation.

The 4% bond at least gives something to work with. My personal inflation rate may not be 4%, it may be much less.
That's a good point that the inflation one experiences can be different than the national rate, depending on various things.

I don't have reliable data on this right now. However the last time I had a very steady monthly spending pattern, I did measure my own inflation rate and found it was within 0.2% of the published national number. That actually gave me confidence in the government's number since it accurately matched my own situation. But it may not match for others.
 

·
Registered
Joined
·
3,383 Posts
That is a very important point. It particularly rings true on an after-tax basis. For someone in the 50% tax bracket, the GIC yield today still offers a projected +0.6% after tax real yield, while the GIC a year ago had a -0.8% after tax real yield.
You are right. I did leave out the after tax part, that makes things even worse.

I don't think anyone should use today's core inflation rate when considering buying a 5yr GIC. It is Covid low (0.7%). Bank 5yr GIC rates about 1.6%, so net 0.9% and after tax (say 0.45-0.6%). Somewhat better if GIC is in taxable account and bought from credit unions and others. TFSA best place for GIC, I would think (if you really want a GIC :) )

Will core inflation stay at 0.7% for 5 years? Check the chart:
 

·
Registered
Joined
·
996 Posts
You are right. I did leave out the after tax part, that makes things even worse.

I don't think anyone should use today's core inflation rate when considering buying a 5yr GIC. It is Covid low (0.7%). Bank 5yr GIC rates about 1.6%, so net 0.9% and after tax (say 0.45-0.6%). Somewhat better if GIC is in taxable account and bought from credit unions and others. TFSA best place for GIC, I would think (if you really want a GIC :) )

Will core inflation stay at 0.7% for 5 years? Check the chart:
I think it is possible that core inflation will stay below 1% for the foreseeable future. Central banks all over the world including the Fed and ECB are signalling they will try to push their inflation measures above 2%, but Japan has had trouble for years, and we are not immune to long stretches of low inflation either.

It is true that a GIC ladder provides a higher yield than a comparable bond fund, but if an investor is interested in keeping "dry powder" for times like March 2020, the lack of liquidity becomes an issue. If I had a ladder with a rung maturing on September 1st, for example, I would be pulling my hair out missing the entire rally.

Of course, one could hold portion of their FI in GICs and portion in bond funds. There is no law against that.
 

·
Registered
Joined
·
10,365 Posts
If anything, it looks like central banks are going to delegate the 2% inflation 'mantra' as an average inflation rate over several years. All for the purpose of encouraging inflation to run a bit while focusing on GDP and jobs growth. That means interest rate suppression for a longer time. Inflation rate WILL exceed short term interest rates but the bond yield curve will ultimately slope nicely to the northeast. Look for 10 year (and beyond) bond yields to increase considerably over the next several years.

If that crystal ball gazing turns out to be a prophecy, it will be best to stay short term, as in XSB for example, rather than going longer....at least for the next few years. And if so, there won't be measurable return from bonds for some time.....BUT that doesn't mean someone should not have a fixed income component. Ballast is still needed in the portfolio.

I fully understand Agent99's desire? insistence? that his FI component should provide a real return ON investment. I would suggest that will result in a volatile fixed income allocation NOT being the ballast one needs for return OF capital. One cannot have it both ways.
 

·
Registered
Joined
·
996 Posts
For example I bought bmo in 2008 for $28
You would have done much better with AAPL or AMZN. Why would you leave so much money on the table? Why would anyone choose BMO over AAPL or AMZN? This is mind boggling! I would recommend an Investing 101 course.
 
21 - 40 of 70 Posts
Top