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Discussion Starter #1
I've read older posts on this topic but have not seen any posts within the last couple of years. My husband and I are moving towards semi-retirement at the end of next year. Our fixed income portfolio percentage is 40%. Currently we have our fixed income dollars in the following:

  • HISA (@ 1.5 and 1.4% respectively)
  • RRSP 5 year GIC Ladder
  • ZAG/ZDB (RRSP/Taxable respectively)
I am beginning to pay more attention to this part of our portfolio because I now feel like I have the equity part of our portfolio as close to where I want it as possible. I am wondering if there are better decisions on the fixed income side. This is especially important because we expect to be selling our principal residence next year which will lead to a doubling of our portfolio value.

HISA investment is essentially emergency funding. I locked in GIC rates when rates were higher (i.e. our 4 year to maturity GIC is at 3%). Obviously rates today are very low. I would love some coaching on how to compare a GIC investment with an investment like ZAG.

Are there other fixed income investments worth looking at?

I am welcoming of all thoughts.
 

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Firstly, I think you have done a commendable job on your fixed income to optimize returns best that you can, or maybe that is my bias showing in that I could see myself in a similar package if I had a lot of fixed income.

You really cannot compare a 5 year GIC ladder with anything other than a ST bond ETF, and only indirectly. Any bond ETF that has a duration more than 3 years (about the duration of a 5 year GIC ladder) is going to be more interest rate sensitive depending on shape of the bond yield curve and in theory, higher returns due to taking 'long' risk (volatility). The only way to do those kind of comparisons is on past performance, comparing 5 and 10 year CAGR performances with that of your GIC ladder over the same periods. Note that you cannot compare shorter periods of time since you don't really know the return performance of your 5 year GIC ladder because you don't know the market value of your GICs (in a non-existent secondary market) in any given year.

So we do the best we can having taken a distant rear view mirror look and that says nothing about what the next 5 years will be like. Central bank moves on short term interest rates play havoc with any kind of forecasts other than a gut feel. It is unfortunately a roll of the dice.

The alternative to a bond ETF is to purchase individual bonds yourself from your brokerage's inventory. BUT these days you have to get into BBB/BBB+ rated corporate bonds in order to get enough juice to outperform GICs by much. Government bonds have pathetic yield, for the most part, worse than GICs. I have had a mix of GICs/Corporate Bonds/Corporate Debentures in my 5 year ladder in my RRIF for a number of years, but there is not much to offer these days. A few have been buying 3-5 year Husky Oil bonds that are yielding relatively high rates for a BBB+ credit rating but I am not a believer in that credit rating. Husky doesn't have the cash/captal to fund its offshore development offshore Newfoundland and is looking for Ottawa to take an equity share. That says something about where that company is at.

Several people use preferred shares as a substitute for bonds (and bond ETFs). Agent99 will tell you all about it since that is where s/he is doing. Five percent yield looks very appetizing but the preferred share market is not for neophytes and the 5 year fixed reset type of preferred has historically been a cemetery for so many investors (just ask LTR and myself). For the average investor, I would stick to the preferred share ETFs but at the same, if you look at the market price record of CPD and ZPR on the TSX, they will give you nausea. The straight perpetuals are much better to hold but have significant interest rate sensitivity. The issue with preferred shares is they have no maturity date. Only the issuer has rights to call. Once you are strapped into the roller coaster, you are along for the ride. A lot of study is needed to understand them before pushing the buy button.

In short, all investors are struggling with their fixed income component.
 

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I am wondering if there are better decisions on the fixed income side.
As conventional fixed income has offered lower and lower returns over time, everyone starts looking elsewhere. I continually tell everyone that will listen, to not concern themselves with the 'return' on their fixed income, as that's not its job. You want to protect your fixed income capital, and if that means the yield is below inflation, then so be it - better than losing capital in that very important allocation. Think again what the purpose of fixed income is.........

I agree with AltaReds post. Myself, I have gone down the preferred share route with fixed resets and found it always ends up favoring the issuer, so there's that. I have also bought corporates that are slightly better yields than GIC's, but in the end always find that I am sitting on pins and needles as the ratings on those bonds are on the outer edge of acceptability to just equal a simple GIC.

The fact is, a GIC is the best return and best guarantee if you accept the lack of liquidity. The liquidity can be ameliorated with 6 month maturities, so that's not really an issue.

ltr
 

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I agree Return OF Capital is more important than Return ON Capital for one's FI allocation but I understand that for those with, for example, 40+% allocations to FI, accepting a return less than inflation (especially on a BT basis) is a hard pill to swallow. The key probably is to have a range of FI products from a bond ETF to a GIC ladder to a HISA along with some measure of risk, e.g. an aggregate bond ETF like ZAG that contains corporate bonds. Just need to remember that bond ETFs and especially corporate bond ETFs can go illiquid at times like they did in March this year and that is when having a healthy HISA cash reserve (and/or maturing GICs) is an important component of the FI allocation.
 

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Discussion Starter #5
Thanks AltaRed and like_to_retire!

At this very moment, I don't think there's a better choice for FI than a EQ /Canadian Tire HISA (1.5-1.8%). GIC rates are awful.

I agree that the FI portion of a portfolio is about capital protection.
 

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Your fixed income choices look fine to me. I suggest minimizing the cash/ HISA part -- just have whatever essential cash you need but not too much -- because this will have the lowest performance over time. In the bond market, normally, GICs and bond funds will give higher returns than cash.

[ Personally I keep my cash outside of my 'fixed income' allocation and don't even consider it part of my investments. I've found it easier to manage my fixed income portfolio ever since I separated the emergency cash from my investments. ]

Some people will undoubtedly comment that under current interest rate conditions, the HISA is competitive with the bonds & GICs. That may be true, but then you have to make active decisions and keep re-evaluating and adjusting. Generally it's better to pursue passive strategies where you don't have to keep trying to "time" interest rates. Therefore, even though HISAs may look competitive with bond yields today, it's probably a better idea to stick with GICs & bonds... that's what I do.

With the GICs, remember to use a 5 year ladder strategy, which means you must continually roll them over and always buy a new 5 year GIC. And you must do this no matter what the interest rate is. Always maintaining the ladder is what will let you get higher returns if interest rates go up. I think that a lot of people buy a GIC once or twice and then forget about them, but it really does take commitment to maintaining the ladder.

For some people, that's a lot of work and if you find you don't like buying more GICs then you might want to replace that part with a short term bond fund, perhaps something like XSH (with reinvested distributions).

The long term return from XSH will be similar to a 5 year GIC ladder, and XSH is hands-free (easier) and liquid. However, the price is more volatile and it's riskier.

So there's a tradeoff there but this is really the only change I could see to your existing portfolio.

I agree that the FI portion of a portfolio is about capital protection.
Generally true, it's definitely for stability, but bonds can actually provide some return. We really have no idea what will happen with interest rates and the bond market. Since 1987, the "total US bond market" (which is similar to your ZAG/ZDB) has had 3% real return. That's actually quite good and it could happen again.

The return of ZAG has been roughly 2% real return over the last decade, and interest rates have been pretty low the whole time.

Many pundits and financial commentators talk as if they can predict interest rates and inflation rates. They say things like "we'll have low yields forever and low inflation forever" but these are total guesses... nobody knows. We can't forecast the real return from fixed income going forward, long term.

For all we know, interest rates could start going higher and before you know it, you might be rolling over maturing GICs into new 5 year GICs yielding 3% or 4%. And it may stay ahead of inflation. The exact same thing can happen in XSH or ZAG/ZDB.
 

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The High Risk of Bonds
 

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The High Risk of Bonds
You should ignore this article and all like it. People have been publishing stuff like this since at least 2012. Often they are nothing more than predictions (wild guesses) of interest rates.

This article for example says: "The 33-year Bond Bubble from 1982-2015 just ended"

Um well, no such thing happened. Bonds have performed extremely well since 2015. That should be a lesson ... any time you hear someone just tell you "interest rates are going up/down" stop for a moment and ask: how do they know this? Was this author correct in 2015 that interest rates were going up? No, he was very wrong.

A few years ago, there were a ton of articles appearing (like this one) about how interest rates are going to start going up, and it's the end of bonds. How scary.

These days, there are a ton of articles saying that interest rates are going to stay low forever, at 0%, so there's no return and it's the end of bonds. How scary.

^ isn't that funny that it's supposedly a horrible situation for bonds, both when rates are going up, and down?

That author linked above is somewhat correct in other points. He writes: "1940-80 when bonds lost 1.0%/year for 40 years". That's roughly true. From 1940-1980, as you can see from this data source, US T bonds returned roughly 2.6% CAGR while inflation was around 3%.

But high grade corporates returned around 4%. In fact the government + corporate bond mix found in VAB/ZAG/XBB/ZDB would have returned 3% CAGR which keeps up with inflation, resulting in about zero real return overall.

That's not a disaster at all. Here's another quick fact for you ... from 1972-1985 when interest rates went up dramatically, often called a bond crash, the real return in US treasuries was actually +0.89% (positive). For much of this period, bonds actually outperformed stocks!

Authors like this guy really don't understand bond funds, or are misrepresenting them. Bond funds can make money when interest rates rise, as long as you hold them long enough. The time horizon when holding ZAG should be 10+ years and you should be prepared for volatility along the way.
 

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Discussion Starter #10
james4beach I really appreciate your thoughtful analysis. I feel that I have found some like minded folks on this forum who understand that "pundits" are doing their thing but that wise investors should not be listening. I am a passionate passive investor learning from folks like Justin Bender and Dan Bortolotti throughout my journey. I am excited to continue my learning journey with this community. I think it is wonderful that folks are so willing to share their knowledge with other curious investors.

I am inclined to execute a plan whereby HISA funds are limited (emergency funds) and tracked outside of my portfolio. I think your analysis on HISA vs. GIC is sound (and frankly represented a gap in my understanding). Because of large portions of our RRSP portfolios being invested in ETFs such as VTI, IEFA and IEMG (in USD), part of our 40% fixed income allocation must be held in taxable accounts (~55%). Would folks recommend splitting that FI part of the portfolio equally between a 5 year laddered GIC and a bond ETF such as ZDB? Is there any data that might favour a different approach?

Lastly, I know many investors are constantly moving their investments to chase higher rates. I don't like the continual opening of new accounts and having assets scattered at many institutions. Having said that, I do struggle with not trying to maximize returns (ie am I being lazy?). How do folks here decide where to hold their GIC ladders and when to move them elsewhere? I find this a real challenge with HISAs and GICs given all the small players in the Canadian marketplace. I currently have HISA funds at both Oaken and EQ Bank with a RRSP GIC 5 year ladder at Oaken. I ensure to generally not go over $100,000 for each institution and each category of investment. Oaken is useful because they offer 2 seperate banks (Home Bank and Home Trust) doubling one's opportunity to hold protected investments in one place. Do folks even consider splitting GIC ladders and holding different years at different institutions?
 

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You should ignore this article and all like it. People have been publishing stuff like this since at least 2012. Often they are nothing more than predictions (wild guesses) of interest rates.

Authors like this guy really don't understand bond funds, or are misrepresenting them. Bond funds can make money when interest rates rise, as long as you hold them long enough. The time horizon when holding ZAG should be 10+ years and you should be prepared for volatility along the way.
Bond funds are not Bonds. They own bonds, but they're actually a different product, with different behaviour and risks.
You lose some of the timing specific behaviour of individual bonds.


This is of course confusing since Stock funds behave like stocks.
 

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Lastly, I know many investors are constantly moving their investments to chase higher rates. I don't like the continual opening of new accounts and having assets scattered at many institutions. Having said that, I do struggle with not trying to maximize returns (ie am I being lazy?). How do folks here decide where to hold their GIC ladders and when to move them elsewhere? I find this a real challenge with HISAs and GICs given all the small players in the Canadian marketplace. I currently have HISA funds at both Oaken and EQ Bank with a RRSP GIC 5 year ladder at Oaken. I ensure to generally not go over $100,000 for each institution and each category of investment. Oaken is useful because they offer 2 seperate banks (Home Bank and Home Trust) doubling one's opportunity to hold protected investments in one place. Do folks even consider splitting GIC ladders and holding different years at different institutions?
Chasing returns is dumb, and keeping simple is worth paying for.
Splitting different years so you manage 5 rungs with 1 institution per run is a lot simpler than managing 20 investments (4 institution per rung or other silliness)

Unless there is an advantage, ie much higher return, or staying in insurance limits, keep it simple.
for $50k, a 0.1% spread is $50, or about $250 over 5years, so might be worth the effort.
For $10k, or a $0.02% spread it drops to only $10/yr or $50 over 5 years, and likely isn't.

For insurance reasons I'd say it's worth it to split, and even sacrifice some return, the point of GICs is security, not performance.

If you have trouble, imagine a cost to dealing with an additional institution, like a credit card is 1/2hr a month (review bill, pay it etc) so 6hrs a year, which is why I only have 2 credit cards.
 

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I am inclined to execute a plan whereby HISA funds are limited (emergency funds) and tracked outside of my portfolio. I think your analysis on HISA vs. GIC is sound (and frankly represented a gap in my understanding). Because of large portions of our RRSP portfolios being invested in ETFs such as VTI, IEFA and IEMG (in USD), part of our 40% fixed income allocation must be held in taxable accounts (~55%). Would folks recommend splitting that FI part of the portfolio equally between a 5 year laddered GIC and a bond ETF such as ZDB? Is there any data that might favour a different approach?

Lastly, I know many investors are constantly moving their investments to chase higher rates. I don't like the continual opening of new accounts and having assets scattered at many institutions. Having said that, I do struggle with not trying to maximize returns (ie am I being lazy?). How do folks here decide where to hold their GIC ladders and when to move them elsewhere? I find this a real challenge with HISAs and GICs given all the small players in the Canadian marketplace. I currently have HISA funds at both Oaken and EQ Bank with a RRSP GIC 5 year ladder at Oaken. I ensure to generally not go over $100,000 for each institution and each category of investment. Oaken is useful because they offer 2 seperate banks (Home Bank and Home Trust) doubling one's opportunity to hold protected investments in one place. Do folks even consider splitting GIC ladders and holding different years at different institutions?
I see nothing wrong, and actually advantageous to splitting FI into a 5 year GIC ladder and a bond ETF like ZDB. It provides some certainty of maturing capital (GICs) while providing some of the benefits of a bond ETF (rolling down the yield curve that James talks about from time to time).

I like the KISS principle so I don't chase yield all around the marketplace. I've done that a bit in the past but never more than 2 institutions in total at a time, and only if it can done entirely online, i.e. no mailing of forms or Void cheques or any of that crap. Right now my two HISAs are EQ Bank and LBC Ditigal and that works for me. They are alternative mortgage lenders and thus will always have 'competitive' rates in the middle of the pack. I would NEVER have registered accounts at those digital offerings due to the complexities and costs of 'transferring' out. One is rather held hostage at these firms if one doesn't like the interest rates on maturing GICs. Further, it will make for highly complex conversions to RRIFs and managing minimum annual withdrawals from each. I have ONE RRIF and ONE TFSA, both at discount brokerages. I won't consider any other option.
 

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Bond funds are not Bonds. They own bonds, but they're actually a different product, with different behaviour and risks.
You lose some of the timing specific behaviour of individual bonds.

This is of course confusing since Stock funds behave like stocks.
Yes very good point. People understand some basics about individual bonds (that the price moves inversely to the yield) and then assume that when they hold a "bond" allocation that they will lose money as interest rates rise. There's also an incorrect assumption that bond funds only gain value when interest rates fall. These misconceptions are based on knowledge of how individual bonds work.

But as you say, bond funds aren't bonds. They are dynamic portfolios. Every bond matures (or is sold very close to maturity) and is reinvested at prevailing interest rates.
 

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Yes very good point. People understand some basics about individual bonds (that the price moves inversely to the yield) and then assume that when they hold a "bond" allocation that they will lose money as interest rates rise. There's also an incorrect assumption that bond funds only gain value when interest rates fall. These misconceptions are based on knowledge of how individual bonds work.

But as you say, bond funds aren't bonds. They are dynamic portfolios. Every bond matures (or is sold very close to maturity) and is reinvested at prevailing interest rates.
Certainly bond funds ride the yield curve, and get some extra mileage in that regard, but there's something about owning a real bond knowing you'll receive the principle back on the maturity date that is reassuring. So even if interest rates rise and take down the share price of bond funds, your real bond will alter its price as it approaches maturity. There is definitely a different reaction to rates with funds versus bonds in the short term, but as you've said before, over the long run there won't be much difference between funds and real bonds.

ltr
 

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Certainly bond funds ride the yield curve, and get some extra mileage in that regard, but there's something about owning a real bond knowing you'll receive the principle back on the maturity date that is reassuring. So even if interest rates rise and take down the share price of bond funds, your real bond will alter its price as it approaches maturity. There is definitely a different reaction to rates with funds versus bonds in the short term, but as you've said before, over the long run there won't be much difference between funds and real bonds.
It's true that owning actual bonds can give some comfort. I do have a bond portfolio that mixes individual bonds + GICs. I always know my guaranteed yield to maturity on every purchase.

Running this for a few years has been very educational. My weighted average maturity is around 8 years, pretty similar to XBB. And the performance is exactly like XBB. Both my portfolio and the bond ETF rise and fall together, almost exactly in the same amounts.

This has helped me understand that bond ETFs do the same thing I'm doing. They hold individual bonds, all of which have a guaranteed positive yield. When held long enough, XBB gives a guaranteed positive return (just like my own bond and GIC holdings). It can't lose money because every fixed income holding is guaranteed to make money.

The only way you can lose money in a bond ETF, or with my own bond holdings, is by selling bonds when their price fluctuates downward. No difference. But I do agree that it is comforting to see my direct bond holdings. When their price fluctuates I know it doesn't matter because I still have the bond to maturity.

Admittedly this is less clear when someone holds a bond ETF.

For people who aren't comfortable with bond funds, don't like seeing their volatility and don't believe that the bond fund will give positive returns over time, there are a few good options.

(a) You can create your own bond portfolio so that it's more obvious why you're guaranteed to have positive returns over time. Just make sure you maintain constant average maturity by always reinvesting bonds, which is a difficult but necessary part of bond fund management

(b) Use a 5 year GIC ladder. This is probably the easiest solution. Here too you must maintain a constant average maturity by always reinvesting to new 5 year GICs. It's a bit difficult but as long as you remember to buy new 5 year GICs, it will work out.

(c) Use a shorter maturity bond fund such as XSB or XSH, which will be less volatile and show a steadier return over time

All are good options IMO. Myself, I hold XBB in my RRSP, plus (a) and (b) non-registered.
 

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james4beach I really appreciate your thoughtful analysis. I feel that I have found some like minded folks on this forum who understand that "pundits" are doing their thing but that wise investors should not be listening. I am a passionate passive investor learning from folks like Justin Bender and Dan Bortolotti throughout my journey.
Glad I could help. It's difficult to tune out the noise from pundits and market-timers. True passive investing means pursuing strategies that don't make short-term predictions, and which rely solely on long term statistics. This sometimes means that today's purchases look bad or even stupid. It took me about 15 years to figure out that these "stupid" (passive) positions are better than active, market-timing decisions.

Those guys you mention are excellent sources. Also check out Ben Felix on Youtube (same firm). He has some great videos on bonds, GICs, fixed income.

Would folks recommend splitting that FI part of the portfolio equally between a 5 year laddered GIC and a bond ETF such as ZDB? Is there any data that might favour a different approach?
Yes, that's roughly what I do. I hold both a bond ETF and GIC ladder.

And make sure you keep buying those 5 year GICs even when interest rates fall. I think maintaining those ladders is more difficult than it seems.

How do folks here decide where to hold their GIC ladders and when to move them elsewhere?
Opinions differ on this one. For many years, I hopped around between institutions trying to find GIC rates. This was hard to manage, especially as one GIC matured and I had to buy a new 5 year. I've found it much easier to keep everything at Scotia iTrade, since they have a very nice GIC inventory from many issuers. Now when I look at my single account, I see GICs with many different isusers, and I can see all the maturity dates in one place.

I find that very convenient and I'm happy with iTrade's fixed income offerings. Other Canadian discount brokerages let you do this too, but I forget which ones.
 

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I have consistently seen very good GIC rates at Simplii (which is actually CIBC), so that's one option:

And here's a screenshot of GICs available at iTrade. There are more issuers than what are shown here. If you might exceed the CDIC limits per institution, this is the way to go.

20739
 

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Discussion Starter #19
That's really what I was looking for. I'm realizing that I will likely be using:

ZAG / 5-year GIC ladder - inside of our RRSPs
ZDB / 5-year GIC ladder - in a taxable account

What I need to nail down is which kind of institutions are best for holding these GIC ladders. I don't want to be moving them all around (my time and energy has value). The discount brokerage that I use (Questrade) does offer GICs. Are there any issues purchasing GICs through Questarde for FirstOntario CU or MCAN? MCAN is CDIC protected. All the other offerings at Questrade have really awful rates.
 

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