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Discussion Starter #21 (Edited)
All that 'age in bonds' stuff was born in an age much different than we are in today...when bonds delivered real returns and the equity risk premium was just 1-2% or so. Attempts to tweak it with 110-age in equities, or in later years with 120-age, was/is just a lazy, lame attempt to justify slightly higher equity percentages due to the widening of the gap between bonds and equity risk premiums.
It wasn't necessarily "age in bond" stuff. More likely "age in fixed income".

As I tried to point out above, it could still be a valid rule. Sources of fixed income other than those from investments should be considered before deciding on allocation ratios. Everyone seems to be ignoring this, although it is a key factor. Some Reading.
 

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Discussion Starter #22
I like perpetual prefs. Just did a Quicken report which shows they constitute ~ 12% of my investment portfolio.

Mostly GWO, Royal Bank, Power Corp, & Power Financial.
I only recently started to add preferreds. My total is now about 11% of which about 1/2 are perpetuals. Others a mix of Minimum resets and straight resets, fairly carefully chosen!

I do have one from Power Financial - They said they may call those? Probably when it suits them :(
 

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Before swearing off bonds entirely, consider the possibility of deflation. We have no idea what the future will bring ... the deflation protection offered by bonds could turn out to be very valuable. Shouldn't you have at least some allocation to bonds to benefit from this protection? We are potentially looking at some powerful deflationary forces right now.

Bonds were a great investment in Japan, even at low yields. And here's Buffett talking about bonds in deflation.

 

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The dividends, distributions, etc that your portfolio produce must be taken into account.

I am more in the camp of 85/15 with the 15 being cash reserves/float.
 

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I'm not understanding something that might be right in my face. Real return over one year for XBB is 5.7% including distributions. That seems like a fairly decent rate , and it has been like that for a very long time especially considering it is fairly low risk. Balanced Mutual Funds like Mawer have also had steady gains, mostly because they invested in long term CSB's bought when rates were higher, but are still providing cash-flow into the distributions. Mawer's bond funds have returned very good returns as well. Has something changed that means it's time to dump balanced funds and bond ETF's/MF's?
 

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I'm not understanding something that might be right in my face. Real return over one year for XBB is 5.7% including distributions. That seems like a fairly decent rate , and it has been like that for a very long time especially considering it is fairly low risk. Balanced Mutual Funds like Mawer have also had steady gains, mostly because they invested in long term CSB's bought when rates were higher, but are still providing cash-flow into the distributions. Mawer's bond funds have returned very good returns as well. Has something changed that means it's time to dump balanced funds and bond ETF's/MF's?
There is no problem with the recent return including the last year; it's been amazingly good. The issue is the projection for returns going forward.

Bond funds (XBB or Mawer Balanced are same kind of thing) have a return that is about equal to the current yield-to-maturity of their portfolios. Currently this number is only around 1% to 1.5% which means that over the next decade or so, you can expect to get roughly 1% annual return. This is a pretty safe assumption because the way bond funds work, the future returns (over next 10 years) correlate very strongly to yields of today.

The past returns don't tell us anything about future returns. The best estimate for future returns of these bond funds is about 1% return for the next decade.

That's what people have a problem with. It doesn't really bother me though, because bond funds are still more stable than stocks, and help in asset allocation (reduce volatility of the portfolio). Plus, bonds could still outperform stocks over the next decade, even at just 1% return. We can't predict the future and we might be headed for deflation, in which case bonds could outperform.

I absolutely would not hold just a bond fund on its own, as a solitary investment. The projected returns are too low. This is why I hold stocks + bonds + gold.

But let's be clear: you will not see a return like 4% or 5% going forward in a bond fund, over the next decade. Those days are in the past.
 

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I would think that some people would invest in their infrastructure instead of bonds at 1% for a decade. A PV system could return 2 or 3%. Or add insulation on the house. Or a greenhouse to grow some food. I am considering all 3, though the PV system is more to run the greenhouse and for emergency backup to keep the water pump and refrigeration going, about 3kWh/day summer, half that winter.
 

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No question @hboy54 there are many good ways a person can invest in themselves or their properties. I plan to also invest in my own business.

Focusing on market portfolios, I claim that "the whole is greater than the sum of its parts". By this I mean that a diversified portfolio which includes bonds has nice characteristics that are beneficial. The portfolio as a whole performs and behaves in a good way, and this is more important than the individual behaviour of stocks or bonds if treated separately.

I really wish I understood this concept 20 years ago when I started investing. Instead, I spent too much time agonizing over each particular asset.

The criticisms of particular assets in isolation are valid criticisms. But when baked into a portfolio, something different emerges because you're dealing with the interplay between different assets, including rebalancing opportunity and different patterns of behaviour.

In systems theory and philosophy, this effect is called "emergent behaviour".

For people who feel a lot of grief about holding bonds, I strongly encourage you to revisit this analysis from the perspective of the whole portfolio.
 

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What James said is correct. People need to consider investor psychology. During the next stock market crash, how will you behave?

During the recent Covid crash, when the stock markets dropped by a third, my own portfolio suffered relatively mild losses. This is because I keep my stock allocation between 30-35%. A strong bond and gold component helped me during the crash. And even those mild losses were no fun!

If I was heavier in stocks, how would I behave and feel? If I saw my portfolio (which took a decade of work to build) cut by 30-40%, how would I react? Would I panic and sell? Or would I just feel depressed and discouraged, which could negatively affect my health? Would it affect how I act in my small business? Would it cause me to make bad decisions in other areas of life, due to stress?

I don't know. How YOU react depends on your personality, job stability, age, net worth, spouse's income, and other factors. Personally, due to my own situation, I can't handle big crashes. Even if they're temporary.

And Covid's crash was relatively mild and short. What happens next time there's a major crash? How would it affect my mental and physical health, relationships, my ability to run my small business, and so on? I don't know. I don't want to find out.

Bonds might only be returning 1%, which stinks. But they can be worth a fortune if they protect you during a stock market crash. If there's a huge stock market crash, and stocks go down 50-70%, and this lasts for ages, yes I'll be buying more stocks during this time -- and I'll also be kissing those 1% bonds.

I think most people overestimate how well they'd deal with crashes. Some people CAN deal with stock market crashes, and that's great. But there's also a survivorship bias involved. Those who sold in a panic and ran from investing aren't posting in this forum.
 

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Well the definition of "investing" is :


the act of investing; laying out money or capital in an enterprise with the expectation of profit

I no longer think bonds at 1% qualify as an investment...lets call the act "divesting" perhaps?
 

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Bonds might only be returning 1%, which stinks. But they can be worth a fortune if they protect you during a stock market crash. If there's a huge stock market crash, and stocks go down 50-70%, and this lasts for ages, yes I'll be buying more stocks during this time -- and I'll also be kissing those 1% bonds.
I agree, obviously :) You said it well there -- 'they can be worth a fortune if they protect you during a stock market crash'. That's a great point. At first glance they appear to not be worth much due to 1% to 1.5% yield.

But there's actually more value hidden in those bond funds, or GIC ladders:

(a) they reduce volatility and make investing easier, emotionally
(b) provide portfolio stability / smoothing, reducing sequence risk
(c) provide ability to withdraw cash even when stocks are down
(d) give you the option to rebalance back into stocks (buy low)
(e) perform great in the Deflation scenario, which let's remember, is still possible
(f) can give good long-term performance if interest rates later go up
(g) can potentially outperform stocks in a given 5 or 10 year period

For me, this is a lot of value. This value exists whether fixed income yields 6% or 1% or -1% ... just looking at the yield (bond price) seems to ignore all of this value.

We all know equities provide higher performance under normal conditions. When you're 60/40 or 50/50, the idea was always that long-term performance comes from stocks, and that's still the case. The bonds provide other value, as listed above.

I don't buy the argument that anything has changed.
 

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But there's actually more value hidden in those bond funds, or GIC ladders:

(c) provide ability to withdraw cash even when stocks are down
All your points are good, but point (c) is very important for those retired investors that choose growth stocks for their equity allocation. People in the accumulation stage often miss this point when they disparage bonds.

Growth stock investors don't enjoy a lot of cash being thrown off their investments and have to sell shares to produce cash flow for expenses. This works great until the market is down and they might have to sell depressed shares. This is when fixed income allocations are tapped until the market recovers.

ltr
 

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Discussion Starter #35
During the recent Covid crash, when the stock markets dropped by a third, my own portfolio suffered relatively mild losses. This is because I keep my stock allocation between 30-35%. A strong bond and gold component helped me during the crash. And even those mild losses were no fun!
Sorry to read that you have only 30-35% in equity. That would mean that you would not have benefited from earlier gains in stocks. Sometimes being overly conservative may not be a good thing. But it that makes you feel good, stay with your plan.

Overall our 60-70% equity (well into retirement) still shows large capital gains after riding a series of crashes. And it keeps churning out substantial dividends. Panic? Why????
 

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Different strokes for different folks. For some, large swings in portfolio value are simply not acceptable. On one particular forum, it appears a number of members are 100% GICs and HISAs. If that works for them, no reason for us to chastise that decision. There is a saying: When you have won the game, why keep playing? Stock markets today globally (in aggregate) are still below market highs early this year, so FI is still ahead if measured from market peak.

I am still willing to play, so at 85% equity, I have seen (and so far, survived) the depths of the Mariana Trench back in March, down a number of Model S Teslas at that time This covid thing isn't over yet so I see no basis to feel smug yet.
 

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Discussion Starter #37
This really is a nice feature of a predetermined asset allocation. It "forces" you to buy low.
I consider that a negative. I always cringe when I hear "predetermined' when discussing investment plans.

With no knowledge of what the future may bring, people decide on a predetermined plan. 30/70 equity/fixed income or whatever.

Can you imagine General motors predetermining that they were going to build 75% full size sedans and 25% pickups and outfit their plants to do only that. Markets change and everyone wants a pickup and those that want a sedan want a small one (like the Japanese build). Maybe not the best example, but you get the idea.

In order to be successful, large companies, small businesses as well as big and small investors need to be quick on their feet and be prepared to change as business/market conditions change. Why lose money on 1% bonds if there is a relatively safe alternative that may earn 5X as much?

Sorry - Getting off soapbox :)

 

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In order to be successful, large companies, small businesses as well as big and small investors need to be quick on their feet and be prepared to change as business/market conditions change. Why lose money on 1% bonds if there is a relatively safe alternative that may earn 5X as much?
A predetermined asset allocation is the right approach for many (maybe most) investors like me.

I have no idea what will happen to stocks, bonds, gold, or any other asset class in the future. If I tried to time these things, I'd lose as often as I won. I suspect that many investors are like me.

Furthermore, continuously studying and analyzing the market comes with a significant opportunity cost. That's time I'm not spending earning money in my small business.

For me and many investors, a passive portfolio with a predetermined asset allocation is the perfect solution.

When it comes to bonds specifically: We've already discussed why they might be worthwhile even with humble 1% returns so I won't rehash.
 

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In order to be successful, large companies, small businesses as well as big and small investors need to be quick on their feet and be prepared to change as business/market conditions change. Why lose money on 1% bonds if there is a relatively safe alternative that may earn 5X as much?
Except very few people can pull this off in practice. Just about all of those "tactical" mutual funds do worse than the couch potato / passive asset allocation. Hedge funds do worse as well, and hedge funds aren't dummies (see the Buffett hedge fund bet).

There are fleets of PhDs and market experts who try their very best to "be quick on their feet and change as business/market conditions change" ... and yet, they do worse than passive approaches.
 

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Discussion Starter #40
I am not surprised at the above response. Investors have been fed those theories for years. Just like that predetermined asset allocation "rule" of age = FI . But it keeps changing? Why would that be? Maybe predetermined doesn't mean the same to everyone?

Another point - Why is 35% equity right for Marco while 85% is right for Altared? There are no 'correct' predetermined rules. People choose their own and smart ones are prepared to change them as the investment environment changes.
 
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