Canadian Money Forum banner

181 - 190 of 190 Posts

·
Registered
Joined
·
2,803 Posts
The big lesson I learned with individual bonds is that you have to manage the weighted average maturity of your portfolio. XBB and VAB are at 10 to 11 years, but my bond portfolio is 7 years. I'm going to keep it at 7 years for a while and see how that goes. Note that this means I have to keep buying longer term bonds as bonds/GICs mature.

This is actually pretty challenging to pull off. The shorter maturities in my bond portfolio are mostly GICs (0 to 5 years) but to get the average up to 7 years, that means you have to buy some really long term bonds too!
Yeah, I can see how you would have to go fairly long with the bonds to get a 5 year GIC ladder's weighted average maturity up to 7 years. My ladder's spreadsheet calculates all sorts of stuff such as weighted average maturity and duration as it use to involve mostly bonds, but I have gravitated to GICs over the years as they have become the best choice in the 0-5 year's ladder construction.

With ladders exclusive to GIC's I have a weighted average maturity of 3.32 years today as I just renewed a couple rungs last month. That means if I wanted to increase the weighted average maturity to 7 years by purchasing bonds, I would need some fairly long maturity dates. I see why you're buying 30 year bonds.

ltr
 

·
Registered
Joined
·
16,346 Posts
Discussion Starter #182
With ladders exclusive to GIC's I have a weighted average maturity of 3.32 years today as I just renewed a couple rungs last month. That means if I wanted to increase the weighted average maturity to 7 years by purchasing bonds, I would need some fairly long maturity dates. I see why you're buying 30 year bonds.
Yup, it would take a lot to increase yours to 7 years. And I initially hated the idea of buying something as far out as 10 or 30 years. It just doesn't feel like a good idea... but really it's the same problem as buying a 5 year GIC. It doesn't always feel great buying 5 year GICs because of the inverted yield curve, etc.

You could try a smaller step and try increasing your weighted average maturity to 5 years, which would involve buying some longer dated bonds without having to go too far out on the yield curve.

Really, these are passive strategies. It took me about 3 years to understand and digest the idea that these are passive approaches to fixed income. There is no attempt to time the bond market.

I like the individual bond approach from the standpoint of the "threat" of rising interest rates. If rates increased dramatically, the price of VAB would plummet. The value of my bond portfolio would plummet as well, but soon enough, some bonds/GICs would mature and have to be reinvested. I then get to buy the now far superior yields at 5 years, 10 years, 20 years, whatever is needed to maintain the ladder.

And even though my existing bonds would have plummeted in value, I also have the peace of mind knowing that each one of them matures with guaranteed return of capital.
 

·
Registered
Joined
·
16,346 Posts
Discussion Starter #183 (Edited)
Boy did this conservative method work out well. And to think that I was about to give up on it!

For quite a while, I was frustrated by how I was underperforming standard bond ETFs. I think it had to do with some amazing performance from corporate bonds, during their bubble (until they blew up spectacularly recently). I wasn't underperforming by too much, but it was still enough to frustrate me ... until recently!

I had been picking individual AAA rated government bonds, mixed in with GICs, for ultimate safety. All this time I had been worried about interest rates, when it turns out that the storm coming was in fact a corporate bond catastrophe. So far, this portfolio of individual bonds & GICs has escaped all of that unscathed.

Additionally I want to mention how well Scotia iTrade's platform has held up during this turmoil. I did not place any bond trades during this crash, but the fixed income platform seemed to still work as normal including showing quotes that seemed about right. I was very carefully checking the pricing that iTrade was showing me.

To show you how well the pricing of these bonds held up, here's a table of some daily portfolio values during the catastrophe. I've normalized the starting value to 100k to hide my actual value.

Code:
2020-02-25    100,000
2020-02-26    99,932
2020-02-28    100,323
2020-03-02    100,893
2020-03-03    101,320
2020-03-04    101,443
2020-03-05    101,918
2020-03-06    102,959
2020-03-17    101,340
2020-03-18    100,586
2020-03-19    100,830
2020-03-20    101,360
2020-03-23    101,822
2020-03-24    101,584
2020-03-26    101,519
2020-03-27    102,016
That's a 2% increase since Feb 25. In comparison, most bond ETFs are down 3% to 5% since then.

It's possible that in the long term, the bond ETFs will still outperform my method, but what I saw during COVID-19 is that the added peace of mind and price stability of these AAA's is worth it. I am happy to forfeit some long term performance.

I will add that managing a bond portfolio is not exactly easy, which is why I have not recommended it to others. Inside both my RRSP and TFSA, I hold XBB. Obviously those were (and still are) getting hit hard by the corporate bond crash but I still think XBB is a pretty well diversified portfolio with reasonably good credit quality. I am very surprised it has gotten hit so hard, but I think it shows just how severe the corporate bond crash is.
 

·
Registered
Joined
·
698 Posts
There is a theory that active management tends to do better in downturns, while passive tends to outperform in rising markets. Many fund companies promote this.......”we won’t knock your socks off all the time, but we’ll save your backs when it gets ugly.“. Research I’ve seen shows consumers would rather take a fairly certain 5% return, than a less certain 8-10% return.
 

·
Registered
Joined
·
16,346 Posts
Discussion Starter #185
There is a theory that active management tends to do better in downturns, while passive tends to outperform in rising markets. Many fund companies promote this.......”we won’t knock your socks off all the time, but we’ll save your backs when it gets ugly.“. Research I’ve seen shows consumers would rather take a fairly certain 5% return, than a less certain 8-10% return.
Interesting. My own experience confirms this. All of these strategies I consider somewhat experimental (for example, this individual bond portfolio & 5-pack) seemed kind of pointless during the bull market. But now they have all been outperforming indexes during the bear market. Suddenly all my non-indexing effort appears to be worth it.

But I think the problem remains: can one consistently implement these active strategies long term? We know this is difficult. Indexing (holding a bunch of ETFs) still offers a major long term advantage. Perhaps that still outweighs the greater volatility and drawdowns in the shorter term?
 

·
Registered
Joined
·
12,227 Posts
Boy did this conservative method work out well. And to think that I was about to give up on it!

For quite a while, I was frustrated by how I was underperforming standard bond ETFs. I think it had to do with some amazing performance from corporate bonds, during their bubble (until they blew up spectacularly recently). I wasn't underperforming by too much, but it was still enough to frustrate me ... until recently!

I had been picking individual AAA rated government bonds, mixed in with GICs, for ultimate safety. All this time I had been worried about interest rates, when it turns out that the storm coming was in fact a corporate bond catastrophe. So far, this portfolio of individual bonds & GICs has escaped all of that unscathed.

Additionally I want to mention how well Scotia iTrade's platform has held up during this turmoil. I did not place any bond trades during this crash, but the fixed income platform seemed to still work as normal including showing quotes that seemed about right. I was very carefully checking the pricing that iTrade was showing me.

To show you how well the pricing of these bonds held up, here's a table of some daily portfolio values during the catastrophe. I've normalized the starting value to 100k to hide my actual value.

Code:
2020-02-25    100,000
2020-02-26    99,932
2020-02-28    100,323
2020-03-02    100,893
2020-03-03    101,320
2020-03-04    101,443
2020-03-05    101,918
2020-03-06    102,959
2020-03-17    101,340
2020-03-18    100,586
2020-03-19    100,830
2020-03-20    101,360
2020-03-23    101,822
2020-03-24    101,584
2020-03-26    101,519
2020-03-27    102,016
That's a 2% increase since Feb 25. In comparison, most bond ETFs are down 3% to 5% since then.

It's possible that in the long term, the bond ETFs will still outperform my method, but what I saw during COVID-19 is that the added peace of mind and price stability of these AAA's is worth it. I am happy to forfeit some long term performance.

I will add that managing a bond portfolio is not exactly easy, which is why I have not recommended it to others. Inside both my RRSP and TFSA, I hold XBB. Obviously those were (and still are) getting hit hard by the corporate bond crash but I still think XBB is a pretty well diversified portfolio with reasonably good credit quality. I am very surprised it has gotten hit so hard, but I think it shows just how severe the corporate bond crash is.
Is the long-run performance penalty worth a slightly better (less bad) drawdown?
 

·
Registered
Joined
·
16,346 Posts
Discussion Starter #188
Another way to look at this could be, the significant choice I made was holding government-only and holding no corporates. A passive indexer can still do the same. They could have used XGB instead of XBB. Morningstar shows the performance as

XGB, 2.30% over 5 years, 3.87% over 10 years
XBB, 1.77% over 5 years, 3.69% over 10 years

Until recently, XGB was the underperformer (due to that bubble in corporate bonds) which is basically the same thing I was experiencing
 

·
Registered
Joined
·
16,346 Posts
Discussion Starter #190
I looked at performance numbers year-to-date of my fixed income portfolio. I was curious to see what the net result was, after the bond ETFs rebounded in April, recovering from their crash.

YTD total returns (as of April 30)
Me: 7.0%
VAB: 5.3%
XBB: 5.3%

I'm still beating the bond ETFs this year. Here's a chart of my maturities, excluding a 30 year bond. I think the spacing is pretty good right now and there's lots of liquidity thanks to the bonds. Below 5 years, it's nearly all GICs. Above 5 years, all federal government bonds.

20169
 
181 - 190 of 190 Posts
Top