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We appreciate all the comments that we read in this forum on an array of different subjects. Most of them deal with equity investing. As a recent retiree's and in these unsettled times is it possible to build a bond portfolio using bonds such as corporate, government, municipal, etc. and as novice investors can this be accomplished using bond or fixed income ETF's. We are trying to achieve a 5% annual return.
 

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We appreciate all the comments that we read in this forum on an array of different subjects. Most of them deal with equity investing. As a recent retiree's and in these unsettled times is it possible to build a bond portfolio using bonds such as corporate, government, municipal, etc. and as novice investors can this be accomplished using bond or fixed income ETF's. We are trying to achieve a 5% annual return.
I am, by no means, a bond expert. However, there are a couple things about bonds that you should take note of.

  • Long term bonds are correlated with equity returns and are subject to interest rate risk. It may be more efficient to invest in equities than long term bonds (IMO).
  • To reduce interest rate risk, you may want to look for a bond ETF/index that has a low "duration". ie. short term bonds (XSB)
  • Real return bonds give returns that account for inflation. (XRB)
 

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The interest rate environment is quite low as we all know. If you are looking for a long term return over the current yields, note that your risk adjusted returns are higher by adding more equity exposure. In other words, you can seek out higher yields in fixed income by taking on duration and credit risk, etc - but generally speaking the amount of risk you are paying for those higher returns are higher than allocating monies to diversified equities.

Read more here for a better explanation.

More, which gives some supporting evidence.
 

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We appreciate all the comments that we read in this forum on an array of different subjects. Most of them deal with equity investing. As a recent retiree's and in these unsettled times is it possible to build a bond portfolio using bonds such as corporate, government, municipal, etc. and as novice investors can this be accomplished using bond or fixed income ETF's. We are trying to achieve a 5% annual return.
Given how low rates are right now a 5% return from a bond portfolio would mean that you need to buy longer (10+ year) instruments. These instruments will be open you to a higher a risk of portfolio fluctuations should (or rather when) interest rates will rise.

If you are buying the bond with the idea of holding it to maturity then this really should not bother you as the price fluctuations in the short term will mean little when the company pays you back your initial investment. All you need to worry about in a long term strategy (ie buy and hold with bonds) is the health and long term prospects of the company you are lending the money to.

Right now lots of Canadian financial companies are offering very attractive (7%+) rates on their Tier 1 capital and longer term fixed floater bonds. They aren't your plain vanilla kind but might be something you want to talk to your adviser about.

One other thing to consider on the longer term side of things is that one real reason why interest rates will eventually pick up is due to higher inflation and bonds will not be able to protect you from this as the income will never rise. So there is a lot to be said about accepting lower rates on shorter term bonds right now and waiting for rates to go higher before you lock in!
 
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