Weekend Reading – Bonds vs. GICs Edition
Hey Everyone,
I hope you had a great week – and I end this week wondering if bonds or GICs are better?
First up, I struggled with the gimmicks related to new mortgage rules aimed at attracting votes:
…and recently, I reiterated my hybrid investing approach with stocks and ETFs in this post:
Weekend Reading – Bonds vs. GICs Edition
Headlining this edition is the bonds vs. GICs debate.
With interest rates coming down, I wondered if this debate has more relevance now – which one to pick?
A brief primer:
Bonds – there are lots of ways to own bonds; most DIY investors can easily own bonds via a bond ETF (Exchange Traded Fund). In doing so, you can own bond durations that are short, long and anything in between. While you’ll have to pay money management fees to own these bond ETFs, the fees are generally small.
GICs – Guaranteed Investment Certificates (GICs) are probably one of the safest investments you can make – but you usually need to lock-up your money to do so. As the word “guaranteed” suggests, the principal and interest on a GIC are guaranteed by the bank or financial institution issuing it and by the Canadian Deposit Insurance Company (CDIC) up to $100,000. There are all kinds of GICs: non-redeemable GICs that generally yield a higher return, cashable GICs that can be cashed after 30 days without penalty, market-linked GICs and much more.
There are a few reasons why I believe GICs might be better than bonds:
- Diversification away from equities – while bonds can help your investing behaviour (helping you ride out stock market volatility) and used to rebalance your portfolio (helping you keep your portfolio aligned to your investing risk tolerance/mix of stocks and bonds) – GICs are not usually correlated to equities.
- Certainty of access – If you’re retired or will be retired soon – keeping some GICs for accessing money in the next 1-2 years could be very smart. GICs are less volatile – they are not subject to market forces including capital losses. If the stock market shut down completely, GIC money set aside could be used without touching any equity assets or any stocks. GICs can also be laddered/staggered easily over time. As GICs mature, you simply buy more and replenish the ladder with any equity sales:
Reference: https://www.td.com/ca/en/personal-banking/personal-investing/learn/laddering-maturities/
If you want to reduce interest rate risk, guarantee your principal, AND earn interest – then spreading out your GICs and their maturity dates in a laddered format can be a smart, overall portfolio risk reduction hedge.
A reminder with GICs they can be Canada Deposit Insurance Corporation (CDIC) insured.
Weekend Reading – Bonds vs. GICs Edition – which one is better?
For the record, I continue to avoid bonds and bond ETFs in my portfolio. That’s a personal decision.
Bonds seem to make bad times better. They can protect investors from themselves. If you need bonds in your portfolio to help you do that then by all means hold them to help you stay the course.
That said, I’m not a fan of medium or longer-bond durations. I don’t think they make too much sense but your mileage, may again, vary.
Source: Google Finance, XBB.
If you put a higher priority on preserving capital and earning money/guaranteed interest like I do, then I believe GICs might win in this debate. Growth has historically come from stocks more than bonds and even more than just idle cash. I use that market history to my advantage. I have a bias to lots of stocks in my portfolio, no bonds, and I keep cash/cash equivalents for my cash wedge. That’s my boring approach. While you might want some bonds in your portfolio to enter retirement owning some GICs could be a better, safer and more dependable fit.
Weekend Reading – Bonds vs. GICs Edition
This debate reminds me other personal finance debates – my answer is always “it depends”.
Advisors, and wealth managers seeking assets under management have told me dividend investing is not a strategy. Meh.
I don’t pay attention to that stuff.
Too funny. 🙂
AND
Indeed. You do you my friends.
What else should folks constantly debate? 🙂
Coffee vs. tea?
Burgers vs. pizza?
Leafs vs. Habs vs. Sens?
Ha.
Henry Mah, a passionate 80-something DIY stock investor couldn’t care less about what folks make of his concentrated stocks. They continue to churn out lots of income. He recently compared some of his stocks vs. a dividend ETF: VDY.
Like Henry, many, many years ago even before 2016….I’ve unbundled my Canadian ETF/any Canadian dividend ETF for income and growth.
After being told Freedom 55 was out of reach, this retiree changed his financial trajectory and retired at 51 (subscription). His secret sauce was not so secret:
“My wife and I built up a sizable nest egg through saving and investing, including paying off our mortgage quickly. I’ve also been reducing my market risk exposure and have diversified my investments as I get older.”
Another good example of reasonable decisions…
Now for something I totally agree with – reduce or ditch RRIF mandatory withdrawals. Our tax system is far too complex and these forced RRIF withdrawal rules significantly benefit the government in terms of forced (deferred-tax) payments as taxable income. Time and again, I wish our tax system was simplified to avoid bureaucracy and needless energy for tax filing. From a Grumpy Tax Accountant:
“As a tax accountant I am able to help a few hundred people or so each year, but I felt by writing this book I could help millions of Canadians. In my job I see how frustrating and complicated the system is (to your point Mark) and how it even affects people with modest incomes. The current Canadian tax filing system causes much unneeded suffering. I realized that instead of assisting only a few hundred complete their tax filings each year, I could share my tips and a vision that could change the system so that it is simplified for everyone.”
A nice interview by Newcomer Investor with EQ Bank. (Disclosure: I am also an $EBQ Shareholder.)
@NewcomerInvest – “SPECIAL EPISODE: Super pleased to welcome Mahima Poddar, SVP & Group Head, Personal Banking at @EQBank on the Newcomer Investor podcast!”
From my friend Larry MacDonald in The Globe & Mail (subscription):
“Paul and his wife invested in the right stocks at the right time and turned a $150,000 investment into $2-million, tax free. To have such large returns in less than five years is rare. The reality is that few investment professionals and even fewer DIY investors have the expertise, are willing to do the necessary research, or can afford to take the risk associated with this way of investing.”
WOW.
How did they do it? Largely all-in on smaller oil & gas companies just after the pandemic hit. Examples in their portfolio include Peyto Exploration & Development Corp. (PEY), Crew Energy Inc. (CR), and other plays. BIG bets.…I couldn’t do it….but good on them for taking the big leap!!
Have you ever taken some big bets? With real estate? With stocks? With your career?
Have a great weekend!
Mark
No GIC’s or bonds for us it’s simply a matter of return risk. Both offer low/no returns and bonds in particular are not risk free. I also dislike locking in part of our capital and not having liquidity. Better to own ENB, FTS, EMA, TD and the likes. We own XUU (+100% to date) and VEF in one account but mostly go with Div stocks, REITS and Income ETF’s.
We do have a fair amount in TLT equivalent covered call ETF’s assuming long term US treasuries will benefit from falling rates as they usually do. That’s when the disclaimer “past performance is no guarantee for….” kicks in. So that is really our only “big” play, hold US debt and collect a >15% yield with some minor cap gain until interest rates stabilize sell and move on. In our view equities are the way to go but we prefer to stick to the blue chip variety no wanky AI or techy business. It’s crazy what is happening, remember the dot com bubble?
We have a couple $K in cash and ~$7K in money market ETF’s where we park emergency/opportunity funds but that’s it (remember we are only 50% retired, no mortgage no debt). When fully retired I think we’d have 3 months worth of cash in MMF’s as a buffer. If your money is not making money it is a liability not an asset with guaranteed loss due to inflation. We have so much access to information and low cost investment tools and with that liquidity vs the old days of trying to get a hold of your Broker (LOL remember those guys?) on a Friday afternoon I feel more comfortable with less of a buffer. To each their own but I always feel there is too much unwarranted caution. Saving an extra $50K means several extra years of work for potential but unlikely what ifs. If things go far south and we loose >50% of our income we would most likely have bigger problems and its time to break out the guns and raid SuperStore of fight off the zombies:)
Interesting article by Mr. Grumpy, although I’m naturally inclined to be sceptic when Industry groups make claims I do agree that more RIF flex is desired esp. concerning withdrawal rates and taxes. Ultimately the Gvt would like it’s deferred income back so if not through higher end of life withdrawals than how? Lower forced withdrawal = lower taxation? Less taxation is always a cute thing to say but ultimately it does little to address the structural retirement (among other) issues plaquing our Country. Acc to StatCan (2022) only ~30% aged 25-44 make RRSP contributions ($3000-$3500 median contribution) the % is dropping and I’d wager it will be a lot lower in 2024. Imo the whole RRSP/RRIF/TFSA system is due for a makeover.
So if we are not saving (or better put are unable to save enough) what one invests in and how one invests matters even more. Unless you have a ton of money GIC’s and bonds are just simply not going to get the job done a 4% return -fees -inflation = 0% return.
For emergency funds/short term cash I’d stick to super liquid MMF’s like PSA or CMR. To get ahead you have to take some risks for most that means equities and being “in the market” through ups and downs. If that means you occasionally feel uncomfortable financially that is the trade off. If you are that risk adverse then unfortunately you can consider to delay or choose not to retire. Personally I don’t think it’s a choice unless Canada fundamentally overhauls it’s Old age and pension plans ( like doubles) retirement risk and return is mostly carried by retirees. So start early, buy Index funds embrace the risk, stick with it and you’d be better of 99% of the time, in retirement ditch some of the index, buy dividend stocks paired with higher yield income funds and go golfing.
Ultimately my only regret is that I only started investing later in life and in earnest only in early 2018. I grew up in a different country no need for saving for retirement outside of old age and pensions so FI mindset quite lacking.
Always enjoy the weekend blog,
Cheers!
Heckuva comment, Ben!
Ya, no bonds, bond ETFs or GICs here in the personal investment accounts but I could see owning some GICs inside the RRIFs, LIFs as I get older. We will see…
You: “When fully retired I think we’d have 3 months worth of cash in MMF’s as a buffer. If your money is not making money it is a liability not an asset with guaranteed loss due to inflation.”
Agreed – we do not keep much idle cash around. Our plan is to enter semi-retirement with a $50k emergency fund in MMFs or cash-alternative ETFs. We will make RRSP/registered withdrawals from beyond that in Year-1 and Year-2. We’ve pretty much got the funds saved up for Year-1 withdrawals now if we decide to move ahead and try semi-retirement in 2025. We have a few things to chat with work about! 🙂
All my best and thanks for your readership. Continued success to you!
Mark
A few issues I’d question the validity of…
“If your money is not making money it is a liability not an asset with guaranteed loss due to inflation.”
What inflation is being referred to here? National CPI? Provincial CPI? Personal CPI? And what rate on the GIC/Bond? I’d even go so far as to say that having a million in GICs earning 4-5% would be one heck of a nice asset to be sitting on in retirement.
“Saving an extra $50K means several extra years of work”
Why? The $50K *could* have been realized from appreciation of a growth equity investment.
“If that means you occasionally feel uncomfortable financially that is the trade off.”
I’m not sure advocating for people to leave their comfort level is always the best advice. Stress can be hugely detrimental to one’s health.
I’d lean more to Mark’s philosophy, one’s personal financial situation is personal and not every financial product (I wouldn’t know a covered call if it bit me on the ankle) is suitable for everyone’s financial plan. Have a plan that fits one’s situation, adapt when/if necessary when/if one’s situation changes, and acknowledge that it might not be suitable for everyone else. YMMV
Thanks, Lloyd.
I fully embrace the mantra personal finance is personal. I’ve found what works (well ) for some sometimes doesn’t apply as much for others depending on their needs and wants.
Sure, there are general rules of thumb (e.g., get out of high cost debt, pay yourself first, keep some cash handy (how much TBC = personal decisions; bonds vs. GIC debates, etc.) but beyond the general rules of thumb all bets are off and rightly so. 🙂
Mark
Hi Lloyd,
Fair points, note to self to incl. references, I typically look at 5yr average BOC inflation which sits at 3.4 ish %, should go down but so will fixed income yields. Bonds/GIC’s average around 4-4.5% depending on the type duration etc. so on a $1M that does provide decent income but if real return is 1% or likely less depending on your cost you’d need more than $1M. On average Canadians only have $129K in their RRSP’s @ age 65 acc. to a Motley Fool article from Sep 16.
Totally right re. it’s personal do what is right for you is always key my bad for not making that more clear. However (and that is just my view) safety can be overdone being too conservative guarantees you underperform i.e. compare bonds to SP500 which returns 10% PY for almost a century but alas crashes every so often. Historically GIC’s, Bonds and let’s add Annuities may have worked but let’s face it if we can’t stomach even a 5% BOC rate the returns on these will be subdued to put it mildly. So no real alternative to holding most of your retirement funds in equities for the most of us. We do not have a $1M portfolio if we did I might have a different opinion. Accepting “risk” is a simply a reality that by and large pays off. For short term cash like applications there are better options imo. So no need for any of these at this point.
Thanks for your comment, Ben. Great stuff.
I fully appreciate and understand: “…So no real alternative to holding most of your retirement funds in equities for the most of us.”
We have to take a bit of risk for returns. Folks like Lloyd have a. done well and b. don’t need to take any further investing risk. Kudos to him. 🙂
Mark
“if we can’t stomach even a 5% BOC rate”
Many of us older folks that might be considering GICs probably don’t have much in the way of debt so borrowing rates isn’t a big factor. It *might* even be to our benefit. Borrowing costs was a considerable factor in the recent run up in the CPI. This affects the increases in CPP, OAS and any indexed work pensions a person may have. So we could benefit from those higher rates on the revenue side, without the detrimental effect of them on the expenditures side.
“I typically look at 5yr average BOC inflation”
Probably meant Stats Canada inflation. And that’s probably the national figure? Best to use a personal factor or alternatively, at least the applicable provincial CPI. In our case, no Stats Canada calculations are really applicable so I use 75% of our provincial number as a guide. I acknowledge this ad hoc guide is highly based on our personal situation.
“being too conservative guarantees you underperform”
At my stage, performance compared to an index isn’t important in the least. Growth in the portfolio is not the primary consideration.
“Accepting “risk” is a simply a reality that by and large pays off.”
Too many variables come into play for this kind of forum when one is considering “risk” and the level one is willing to accept.
I’m not sure I’ll ever use GICs or Bonds – well, I know I will never use bonds.
Maybe GICs. I’ve been fiddling with my forecast sheet and keep switching the timing of turning off my DRIPs. Actual retirement will take place sometime between Jan 1 and Dec 31 2027. I tend to think I will wait until the end of the year to pull the plug as I think it makes a lot of sense from a taxes standpoint. I turn 60 in October of that year. I assume my wife will retire and start her pension in September of 2027.
So, do I turn off the DRIP in April? July? October? Between her DB pension and my dividend income, plus melting down our RSPs I’m not sure — how much cash do I really need to put into place before retirement? A part of me thinks I should just DRIP everything right to the very end of the year (or at least November) and then rely on my dividends, her DBP and start the meltdown of our RSPs.
I really struggle with this, so I’m very open to getting input from everyone here for your various rationale of building a larger (or smaller) bucket of cash leading up to actual retirement. I’d love to hear from people who have started their retirement journey with a dividend income stream and how they managed their reinvestment plan. Would they change what they did? Any advice for me?
Just retired two weeks ago and kept dripping until retirement. But I have a modest DB pension which covers core expenses. Mark’s advise of building a cash wedge for annual expenses is excellent and would be very beneficial until your wife’s pension kicks in. Just my 2 cents
Hi Jimmy,
Thanks for the comment. I think we’re on a similar path. My wife’s DB pension (also somewhat modest as she has taught an average of 75%) will be our core, and she will start her pension ahead of me retiring – although we will rely on her pension as part of our income stream, so it won’t be “saved up” ahead of me retiring. I’m leaning towards a 3-6 month window to stop by DRIP and let some cash accumulate ahead of retiring, but very much interested in what others have done. Thanks again.
I agree, Jimmy.
Congrats on your retirement!! Any big plans?
Mark
What is meant by “melting down our RSPs”? Is this just to zero them out as a bridge to CPP or OAS? Will those funds be a source of necessary income or will the funds just be invested in a non-reg account or TFSAs ? Will they be RRIFed or just have periodic withdrawals made directly from the RRSP?
So many variables in how people intend to utilize their RRSPs.
I can offer one tiny bit of advice as to what not to do….don’t just compare the RRIF factor chart to your current yield to get a handle on how long income distributions will cover the minimum withdrawal. It likely won’t be accurate. 😉
Hi Lloyd,
Great question and thanks for your response. For me / us, what melting down our RSPs looks like is fully divesting them – for me, by age 70 when I will start my CPP, and for my wife a couple of years sooner (she is two years younger than me). She will start her OAS at 65 to make up for the loss of her bridge benefit, but also delay CPP to age 70 (all these decisions are subject to any changes in our health).
As for the actual RSP withdrawals, we both have somewhat modest RSPs (mostly due to me making some serious DIY mistakes until 2019). For my RSP I will withdraw about 10% of the balance in year 1, and escalate that with inflation. My plan shows that will last about 11 years and one quarter. My wife’s withdrawal plan is a bit more aggressive at 13%, rising with inflation after that, and lasting about 8.5 years – also timed to wrap up around when she will start OAS. Today I model 2.75% inflation and a 6.1% rate of return, but I can adjust those however I like. We will convert our RSPs to RRIFs immediately and take the minimum withdrawal January 2nd (to avoid withholding taxes), and then based on cash flow, wait until as long as possible in the year to take the rest of the annual withdrawal. This will minimize the length of time we have to wait for the tax refund. Based on my planning, and without any income splitting, or taking any pension credits/age credits, our tax rates will be very low – around 7%. That number may be more like 5-6% after we can leverage those other credits. Every year, after I file our taxes “for real”, I simulate our retirement filing by adjusting our ages and create fictious slips for pension income, RRIF income, etc. to validate the tax estimates that I have in our plan. With the income brackets constantly rising the calculations are conservative, in my opinion.
The “base plan” is to contribute the max to TFSAs every year. In some years, if our income streams don’t keep pace with inflation, then we will supplement from our TFSAs – but replace those funds each New Year by moving some funds from our non-registered accounts. The TFSA withdrawals will only happen if we need them. We have an ambitious travel budget planned and I expect we will not actually utilize it every year, but that remains to be seen.
I have planned 14 years of “go-go”, 8 years of “slow-go” and then I’ll be 82 when we start “no-go”. It mirrors about how things went for my parents. If we’re lucky, we will be able to extend things a bit, but I think it’s a reasonable plan.
Thanks again for your interest!
“but I think it’s a reasonable plan.”
Agreed. I think I see what you are doing now.
Well, “melting down RRSPs” tends to have a different approach since it tends to involve leverage. I personally won’t do this myself. I’ll have a post about that in a few weeks…
“So many variables in how people intend to utilize their RRSPs.”
Totally. The more successful DIY investors I know though, tend to make slow withdrawals from RRSPs/RRIFs and get the money out over time vs. waiting until age 71. Waiting until age 71 to turn RRSPs > RRIFs is really only when necessary/last resort (i.e., delayed retirement).
Mark
I forgot about the leverage piece with a “traditional” RSP meltdown. Mark well knows that I use leverage, but not in this capacity, so thanks for pointing that out Mark.
All good!
I can only speak to what I know others have done, James and what I intend to do….
In terms of RRSPs/RRIFs, LIFs, etc. for those registered accounts, most investors I know stop DRIPs either a few years before or at the time of retirement. Then, as equities, stocks, ETFs, GICs, etc. pay out interest and dividends and distributions and the like, they tend to withdraw that cash for the first few years before setting up a system to make equity sales from those accounts over time.
See Lloyd and other comments on this site for any reference. Not a must of course!
🙂
Cheers,
Mark
It’s interesting to also put perpetual rate preferred shares on the table in the context of this conversation (so excluding rate resets or other kinds).
Good capital appreciation as rates have gone down and the yields are pretty good at the moment. Higher risk than a GIC or bond, but potentially a worthwhile reward if you’re looking for a steady income stream and don’t need to touch the capital.
Hi Mark,
I find the characterisation of bonds likely to confuse readers. It seems like bond ETFs are meant although just the word “bonds” is used. Bond ETFs act differently from individual bonds, so it’s important to make the distinction.
Compare GICs with individual bonds and the differences are fewer. I think one could hold a GIC or individual bond ladder and achieve the same effect either way. Bond ETFs are completely different because they cannot be held to maturity and must be sold on the market.
Pointing this out would help clarify that the “bonds” (ETFs) being discussed are really only one form of holding bonds.
That’s fair, Stefan, which is why I have a qualifier about “…there are lots of ways to own bonds; most DIY investors can easily own bonds via a bond ETF (Exchange Traded Fund).” Thanks for pointing that out – for sure more than one way to own bonds beyond an ETF!
Do you own any bonds or bond ETFs?
Mark
Thanks, Mark. I’m in the accumulation phase and hold government bond ETFs to dampen the impact of market crashes.
When I near retirement I will look at bond and GIC ladders because holding fixed interest investments to maturity feels less risky than selling bond ETFs on the market.
I’m not a conservative investor, but what stuck with me when reading The Great Depression: A Diary by Benjamin Roth was how hard equity and real estate were hit while government bonds persevered. I want to have some of that in my portfolio as insurance.
I can appreciate that, Stefan re: cushion for market crashes. There will be another one, eventually. 🙂
I don’t have any intention of holdig any bond ETFs in retirement, e.g., XBB, or VSB, etc. I will likely keep my basket of bond-proxies as some dividend paying stocks and keep some growth too in the form of lower-yielding, higher growth individual stocks, XAW, QQQ and other.
What’s the retirement date/target? Got a number in mind?
Mark
Seeing dividends come in year after year gives one confidence that they are really all you need! I can see the appeal and how bond proxies can be used.
I calculate a retirement target using estimated expenses divided by a “safe” withdrawal rate, times a safety factor to protect against surprises. For example, if the goal is $60k/year gross income then $60k / 4% * 1.33 = $2m would be the target using a 4% safe withdrawal rate and 1.33 safety factor (not my actual numbers). It’s just a model but I found it a useful way to pick a target number.
As I get closer to the target I’m less inclined to quit employment cold turkey. Instead I want to shift focus to things that matter regardless of whether they further career goals or not. For that reason I don’t have an actual retirement date in mind. I’ll keep accumulating and looking for opportunities in life that may eventually lead to retirement.
I like it!
Ya, the 4% rule is a decent rule of thumb for knowing you have your “enough”.
Based on my work at Cashflows & Portfolios, usually anyone in their mid-50s with >$1.5M invested, no debt, has done rather well to say the least and set themselves up very well for any retirement.
I have always considered all of my dividend stocks the equivalent of a bond. They both would provide me with a yield and they both can go up or down in value. Simplified view but I like simple. For that reason I don’t have bonds in my portfolio. I do have a 3 year GIC ladder that I plan to keep doing for the next few years even though rates are going down. It’s a safe investment and I am very close to retirement so I am in the process of taking some risk off the table and locking in some of my wins. The markets are good now and taking some profits seems prudent at this stage in the game for me. To each their own. Cheers Mark.
I hear ya, Don. I believe there are many “bond-proxies” to invest in, in Canada via dividend paying stocks while getting some slight upside over time as well. It’s part of the reason I don’t own any bonds to be honest = favour my 20-something basket of CDN dividend paying stocks instead.
I too, am very close to semi-retirement so I want cash/cash-equivalents ready to withdraw vs. touching any equities. I might use some GICs in the future…but for now I have a mix of cash/cash-alternative ETFs/MMFs for Year-1 for all our registered withdrawals and I’m working on setting aside Year-2 withdrawals this year in fact.
Mark
Hey!
What do you think about ZMMK and their ilk. Seems to me like a GIC your capital is safe, and you get decent interest, I think 5% now.
I can see with rates dropping the rate on ZMMK will drop at some point, however it is more liquid than a GIC.
Regarding bonds, my theory is with rates set to keep dropping, it is predictable that (older) Bonds will go up in value as they are set at a higher rate…..so Bond funds should go up as the FEDS lower rates….we will see.
I agree BK, we will see. Rates down = bond prices up in value.
I don’t mind money market funds. Great way to generate some income vs. idle cash. I probably wouldn’t put too much into ZMMK inside a registered account but I do believe such ETFs offer a great way to generate some yield prior to retirement withdrawals, as an example. Very liquid to your point and I own some cash-alternative ETFs (e.g., CBIL) in some small amounts since I’m going to tap some of our LIRA > LIF income within the next 4 years and I would like a few years of cash-related withdrawals ready without touching any equities.
Thoughts back?
Mark
I am using ZMMK as two of my three year ready cash buckets. I figure it will not go down and gives a good rate. I am too cheep to actually keep too much cash around.
“Cash is like oxygen. You want to be sure it’s there, but you don’t need to have excessive amounts of it around.” – Warren Buffett
Overall I do not feel confident with Bonds, Bond ETF’s behave rather different it seems.
I did experiment with ZTL in 2019 as they were slashing rates in a panic, figured I could front run it. It worked as rate trend seems predictable. Seems they are on a easily identifiable trend downward again.
Core & Explore.
LOL. “I am too cheep to actually keep too much cash around.”
Ya, I see the appeal and need for bonds and bond ETFs, I did own some way back when in my LIRA in fact but I decided many years ago I would be giving up some returns if I owned some and so ditched those almost 10 years ago now and never looked back since.
Firstly, Bond ETFs are not bonds! They are Exchange Traded and therefore subject to market sentiment. They hold wide swath of bonds and therefore only yield the average, which is often not very good. They also lag changes in interest rates and mhave no fixed maturity. I learned early on to avoid them. They may suit some investors.
I do at times buy GICs or individual corporate bonds with fixed maturity from on-line brokerage when they appear attractive. Corporate bonds should yield somewhat higher than GICs to account for the higher risk.
Right now, yields on both GICs and bonds are dropping fast and I look elsewhere for pseudo fixed income. At our brokerage (BMOIL), GICs are currently yielding only 3.5% for 5 yrs. If you use an inflation rate of say 2.5% and marginal tax of 35% you may be preserving capital, but really just treading water. And that is today before next series of tax cuts.
I bought perpetual preferred shares before tax cuts and that have high yields and are appreciating as interest rates drop. Not as good now, but it is still possible to buy perpetual preferreds of companies with high credit rating for less than their $25 par value, that yield ~6%.
A special case of preferreds are the Partner’s Value split preferreds – essentially a Brookfield company. These have a fixed maturity date, so are similar to corporate bonds. Difference, is that distributions are as dividends and not interest. I own these.
Very good point, Graham and I have the extra qualifier beforehand since I after I re-read that section I know I could have been more clear – bond ETFs are just one way to invest but I did include “…most DIY investors can easily own bonds via a bond ETF” = one way to own bonds.
🙂
I would think rates/yields on GICs and bonds will continue to drop. It’s not for me right now, bonds. Those can work well for folks though…
I’ve never bothered to own preferreds. Do you own any right now – you own Partners Value split preferreds? What’s the big appeal over common stocks or dividend stocks that are likely to generate more total return? Curious!
Thanks for your detailed comment.
Mark
Mark, We currently have about 20% of our portfolio in preferreds (1/2 of our 40% fixed income allocation). Haven’t always had this much. I bought some of these when interest rates were high and therefore preferred prices low. Even today, some perpetuals will yield ~6% in dividends on cost forever (or until called). If trading below par, Total Return will be better if interest rates continue to drop. These are with investment grade companies with P1 or 2 credit rating. We do have a much larger allocation to dividend stocks on the equity side.
We have a ladder of 6 PVS preferreds (About $60k). They average about 5.5% total return to maturity. More bond-like because of fixed maturity. Nothing great, but better than GICs/Bonds and relatively safe as fixed income allocation should be.
Makes sense: “bought some of these when interest rates were high and therefore preferred prices low.”
I appreciate reading about your approach since I’m more the sum of a. common stocks + b. ETFs like XAW, QQQ and HEQT and then c. cash/cash-alternative ETFs/MMFs for more liquidity.
Any new additions planned for your portfolio this year or next?
Mark
As you may know, we are well into retirement (in our mid-80s). Over long periods our dividend stocks have done reasonably well, but if I look at say 5 or 10 yrs, the Total Returns of some are not very good. Even names like BCE, BNS, REI.UN, TRP, CU, T and others have single digit Total Returns over 0-10yrs. They may be bond-like, but bonds and preferreds are likely less volatile.
We don’t have much in the way of new money to invest. Only dividends and interest that we don’t need. Instead of specific stocks, I am mainly moving to XIU. We have only about 4% in US/World equities. XIU has actually outperformed the S&P500 over past ~20years but many don’t believe that 🙂 https://www.dropbox.com/scl/fi/ax0zg5g0el735g99s8mwk/xspvsxiu.JPG?rlkey=ivdlpmz74ofz87zex7m6b5eir&dl=1
Thanks, Graham. I do recall now… re: “…well into retirement (in our mid-80s).”
Ya, I still own small bits of BCE (<2% of portfolio) and Telus too. Not worried long-term. More bond-proxies for me.
I own other stuff for growth like CNR, CP, WCN, ATD, BN, and more….
When in doubt for Canada, I have that plastered on my site, I like XIU too. Lots. That’s the only ETF I would own for Canadian investing if forced to choose one ETF. Instead, I’ve unbundled that ETF and own many of the top-20 stocks in XIU directly.
In terms of S&P 500, vs. others stuff I own XAW. We have >10% of our portfolio in that and it has done well since we’ve owned it since starting in 2016.
Have you considered a mix of XIU + XAW?
Mark
Hi,
Similar to Lloyd, I use GIC’s heavily in my LIRA and RSP’s. Some are in my non-registered as well – but let me comment on the registered accounts:
I turned off DRIP on my equities in these registered accounts a couple years ago, letting the cash side build up. Cash is deployed into GIC’s and/or RBF2010/TDB8150. In 2 years I’ll convert the LIRA and RSP to PRRIF’s, and start taking the minimum withdrawals. At that time there will be 4 years or so of annual equity income in these accounts, sitting on the cash side. The goal will be: the cash side will always have a buffer of 4 years worth of annual dividends that these account accrue.
I know going forward I’m not going to be yielding much on this cash. However having a good cash buffer means a lot to me (ie not having to sell an equity when it’s under water).
CJ
Mornin’ CJ
Other than turning off my DRIPs at 1 year prior to converting the equity RRSP and LIRA to RRIF and LIF, that’s exactly what I did. But I only went 1 year as I expected the distributions would exceed minimum withdrawal for a few years anyways so the cash buffer (TDB8150) would continue to grow over the years. When a GIC matures I just add the extra into it and reset it for another five years. At some point, the minimum withdrawal will exceed distributions and then I’ll start to use up the GICs buffer. When the GIC buffer is gone, I’ll be exploring transferring-in-kind from these accounts versus a monthly income stream. Will cross that bridge when/if I get to it though.
Have a good day!
I think TDB8150 is great and there are other great ISAs (Interest Savings Accounts) as well. I know a few DIY investors that own this fund.
Lloyd, do you keep this fund for your non-registered savings/cash buffer?
We have turned off all DRIPs inside our RRSPs at this point – cash wedge building for future RRSP withdrawals. Did you do that prior to retirement?
Mark
I use TDB8150 in the non-registered investment account at TDDI. That account only holds BAM (no DRIP) and I use the ISA to hold the dividends over the year and then transfer those funds to the TFSA (at TDDI) in the new year.
Every other account at TDDI also has a TDB8150 holding for orphaned cash.
The non-registered emergency cash is held at Hubert, mostly using their one year quarterly term.
I ceased my DRIPs in the RRSP and LIRA around a year before the withdrawals started. I used those funds to build a five year GIC ladder in each account. As each year’s rung comes up for renewal I add to it from the TDB8150. Will continue to do this as long as monthly distributions exceed minimum withdrawal requirement and then reverse the flow so to speak. Sounds more complicated than it is.
TDB8150 = a great product for the non-registered investment account for sure…
Ya, I’m going to do the same: I’ve already stopped all DRIPs inside RRSP and likely to do the same with LIRA in a few years.
You seem to have an excellent approach.
Mark
Great stuff, CJ.
I put the same question to Lloyd: we have turned off all DRIPs inside our RRSPs at this point – cash wedge building for future RRSP withdrawals. Did you do that OR are doing that prior to retirement?
RBF2010/TDB8150 are great. Super smart I think.
“…The goal will be: the cash side will always have a buffer of 4 years worth of annual dividends that these account accrue.”
That’s a very good buffer. We have Year-1 of RRSP withdrawals established now. We’re working on Year-2 this year. I think we’ll end up having close to 2.5 years set-up in advance when done. We’ll see.
Mark
Hi Mark,
My buffer of having 4 years of annual dividends built up in my registered accounts on the cash side might be a little excessive for some, but it makes me sleep at night.
My goal is to sell my equities in these accounts at what I paid for them (anything extra is gravy)! I set my expectations low.
My registered accounts are all 100% equities, blue chip boring dividend payers and a couple of dividend ETF’s. The annual dividends received exceed the annual PRRIF minimum prescribed withdrawals until I’m around age 85.
The most important point is, in using this strategy, I will exceed my retirement income goals. Note that I do have a small defined benefit pension plan, and of course the CPP/OAS soon.
CJ
That’s very good and seems to be a lot! ….re: 4 years of annual dividends built up in my registered accounts on the cash side.
Everyone has a different sleep-at-night factor.
We’ve got Year-1 of RRSP withdrawals ready to go in 2025 if we choose to use them.
We’re working on Year-2 (2026) over the coming months.
Between 2025-early 2027, we might have enough dividends and distributions paid (since DRIPs are off) to fund 2027 RRSP withdrawals in cash as well. We’ll see?!
That’s impressive: “…dividends received exceed the annual PRRIF minimum prescribed withdrawals until I’m around age 85.”
Nice to have that cashflow from the portfolio! 🙂
Like you, I have a small DB pension eventually + CPP + OAS but I’ll be too young to tap those income streams for the coming 14-15 years. All good.
I appreciate Mark’s comment on “sleep-at-night” factor. I often have to remind myself that I am too comfortable with risk, and that’s how I ended up making all those mistakes pre-2019.
Thanks for all the comments and keep them coming – I hope I’ll hear from a few more who have “been there, and done that”.
Thanks!
Yes, I am only happy to learn from others here – what works for them, what doesn’t or hasn’t! 🙂
We use GICs. Mostly in the RRSPs. More for a preservation of a set income stream if needed, not so much as an investment. Bonds would also work for what we use them for but I find GICs just easier to deal with and the wife understands them better. Plus we use a local credit union for most of them and that institution supports lots of local events and other things such as scholarships for local students.
We used to be 100% equities up until just after I retired. Gradually started building ladders and currently we sit at about 60/40 in the total portfolio. Wasn’t a target, it’s just where we ended up.
It works for us for now. YMMV
I think GICs vs. bond ETFs make more sense to be honest.
I think you know, Lloyd but we’re largely / close to 100% equities except for our cash/cash-alternative ETFs and some MMFs. It will be interesting to see if I/we eventually dial-back the equity % in our portfolio as we age.
Mark
We were around 100% equities when we were at your stage as well. Then it got to the point where I started to feel that it was no longer necessary to have that level of equity exposure. Once I started moving some over to GICs (around 2017 IIRC) I just felt a bit less apprehensive. When I forced the wife to review what I was doing with the portfolio, she strongly indicated her preference to have even more GICs. So we now sit at around 60/40.
Gotcha. We’ve got Year-1 of registered/RRSP withdrawals ready + another year’s worth of cash/cash equivalents just in case.
You might recall I want to enter semi-retirement with ~ $50k or so in cash/cash equivalents/emergency fund as a buffer just in case.
We’re now working on saving up for Year-2 of RRSP withdrawals and hope to have that in place by summer 2025 ish.
This plan seems to work for both my wife and I – which is important. 🙂
Mark