Why would anyone own bonds now?
“Many investors have been saying for years that rates can only go up from here, rates can only go one direction, rates will eventually go up. Will they?” – My Own Advisor, September 2021.
My, how things can and do change.
In today’s post, I look back at what I wrote in September 2021 to determine if I still feel that way for our portfolio.
Why would anyone own bonds now?
Why own bonds?
For years, decades, generations in fact, bonds have made sense for a diversified, balanced portfolio.
The main reason is this: bonds can reduce volatility due to their low or negative correlation with stocks. The more that investors learn about diversification, the more likely they are to add bonds to their portfolios.
That said, they don’t always make sense for everyone, all the time, always.
I’ll take a page from someone who was much smarter than I am on this subject:
Reference: The Intelligent Investor, via Revised Version, Commentary by Jason Zweig.
Another key takeaway from this specific chapter of The Intelligent Investor is the 75/25 rule. This implies more conservative investors that don’t meet Ben Graham’s criteria above could consider splitting your portfolio between 75% stocks and 25% bonds. This specific split allows an investor to capture some upside by investing in mostly stocks while also protecting your investments with bonds.
Because stocks offer more potential upside, there is higher risk. Bonds offer more stability, so they come with lower returns than stocks in the long-run.
As a DIY investor, this just makes so much sense since I’ve seen this playout in my/our own portfolio when it comes to our 15+ years of DIY investment returns. Our long-term returns exceed the returns I would have had with any balanced 60/40 stock/bond portfolio over the same period.
There is absolutely nothing wrong with a 60/40 balanced portfolio held over decades of course.
From Russell Investments earlier this year:
“Fixed income has historically been considered the ballast in a portfolio, offering stability and diversification against equity market fluctuations. Over the last 40 years, a balanced portfolio of 60% Canadian equities and 40% Canadian bonds would have returned 8.5% annualized with standard deviation of 9.3%. While a portfolio consisting solely of fixed income would have had lower return with lower risk, a portfolio consisting solely of equities would have had only slightly higher return but substantially higher risk.”
Source: https://russellinvestments.com/ca/blog/the-60-40-portfolio
| 1/1983 – 12/2022 | Canada Equities | Canada Bonds | Balanced Portfolio |
| Annualized Return | 8.8% | 7.2% | 8.5% |
| Annualized Volatility | 14.4% | 5.3% | 9.3% |
Pretty darn good from 60/40.
So, while I continue to believe the main role of bonds in your portfolio is essentially safety – not investment returns – we can see above that bonds when mixed with stocks can be enablers/stabilizers and deliver meaningful returns over long investment periods as well.
As Andrew Hallam, a Millionaire Teacher has so kindly put it over the years, including some moments on this site to me:
…when stocks fall hard, bonds act like parachutes for your portfolio. Bonds might not always rise when the equity markets drop. But broad bond market indexes don’t crash like stocks do…
Is that enough to own bonds in your portfolio?
Maybe.
Here are a few reasons to own bonds in no particular order.
1. Bonds can be used to counter stock market volatility.
Call them parachutes or anchors or use any other metaphor you wish but bonds tend to do their jobs when stock markets tank. 2022 was an exception. 60/40 balanced portfolios are not dead but they did take a beating in 2022.
Many investors, dare I say most investors (?), have a hard time with market volatility. I’m certainly not immune to it. The ups and downs, especially the big market downs, can be gut-wrenching to live through. Owning bonds in your portfolio can help bring the overall portfolio volatility down a few notches through prudent asset allocation.
Personally, I’ve tried to learn to live with stocks as much as possible for as long as possible.
Depending on your goals, taking into account long-term potential reward against short-term price fluctuations, some investors may not be comfortable with a 100% equity or near-equity portfolio.
Maybe only younger investors should be in 100% stocks.
2. Bonds can be used to rebalance your portfolio.
Even though I’m not a huge fan of bonds myself, this might be one of the most compelling reasons to own bonds at any age.
When the stock market sells off, that’s ideally the time you want to dive in and buy your stocks on sale.
However, unless you are very comfortable with leveraged investing – you need money to buy such stocks on sale. That can come from cash savings for sure but for many investors, that can also come from bonds within your portfolio.
In our portfolio, because we’ve largely learned to live with stocks, we tend to buy more stocks when they come on sale and/or we buy stocks periodically during the year to increase our equity holdings from any cash balance built-up over the year.
Using the cash, in recent years, I’ve been moving away from just a concentrated basket of Canadian dividend paying stocks for income and owning more low-cost ETFs instead for extra diversification.
Check out some changes I’ve made to our portfolio to increase equity diversification.
Lessons learned in diversification – reducing my Canadian home bias
Instead of selling bonds to buy our stocks, I therefore use cash savings.
I will continue to use cash savings to make more equity purchases as I enter semi-retirement.
Consider keeping this much cash on hand yourself – in your asset accumulation years or retirement years.
3. Bonds can be used to spend cash when essential.
Can you have too much money saved up for retirement?
Can you have too much money in your RRSP?
For 99% of Canadians, I doubt it. 🙂
At the end of the day, having a nest egg in your 50s and 60s that forces you to navigate the tax implications of your RRSP decisions is a great problem to have. I hope to be “that guy”.
However, if you needed to tap your RRSP or any part of your portfolio in an emergency, for a big expense, then selling off fixed income assets can be the best decision you can make.
Why?
Big picture, we already know that stocks tend go up more than they go down. The problem is, we simply don’t know when nor by how much.
Yet thanks to the power of long-term human productivity and innovation over time, unless something changes, stocks should continue to rise more over time and deliver returns to investors who ride equity markets accordingly over bonds. The risk premium is there for stocks over bonds. Your potential return compensates investors for taking on the higher risk of equity investing.
Should you need to access your portfolio for any financial lifeline, then consider selling some bonds for cash. At least that’s my thinking.
Why would anyone own bonds now summary
No doubt the list goes on…
Generally, investors who plan on holding their bond until maturity typically don’t need to worry about the movement of bond prices on the secondary market as they will be repaid their principal in full at maturity, barring a default. But for those looking to sell their securities sooner, an understanding of what drives bond pricing and yields is essential.
Recall:
- The price of a bond relative to yield is key to understanding how a bond is valued. Essentially, the price of a bond goes up and down depending on the value of the income provided by its coupon/interest payments relative to broader interest rates.
- Owning a bond is essentially like possessing a stream of future cash payments. Those cash payments are usually made in the form of periodic interest payments and the return of principal when the bond matures.
- Bond prices and interest rates have an inverse relationship. When interest rates rise, newly issued bonds offer higher yields, making existing lower-yielding bonds less attractive, which decreases their prices.
We should also discuss bonds as a hedge for deflation (since inflation is a killer for bonds long-term). When there’s inflation, your bond income is worth less over time, but in a deflationary environment, they’re actually worth more. So, some investors might own bonds as a hedge for any recession.
However when it comes to owning fixed income I believe these three (3) key reasons come to mind:
- Bonds can be used to support your investing behaviour – ride out stock market volatility – including being strategic to buy more stocks soon.
- Bonds can be used to rebalance your portfolio – helping you keep your portfolio aligned to your investing risk tolerance and therefore asset allocation (mix of stocks and bonds).
- Bonds can be used for spending purposes – where some fixed income is “king” for major, upcoming, near-term spending.
The main reason I would keep any bonds (and I still don’t have any right now) is if I was saving for a major purchase in a few years (e.g., secondary residence?). Then, I would like rely on some form of fixed income between now and then to help secure that purchase. Otherwise, an interest savings account in the short-term will do that.
Unless something drastically changes, I will continue to believe the main role of fixed income in your portfolio is essentially safety.
My plan is to hold a modest cash wedge as I enter semi-retirement and keep a strong bias to equities. I believe any cash needed in the short-term (0 months up to 1-year) for any spending should never be in stocks.
Cash or cash ETFs are preferred for any time horizon <1-year of spending.
In fact, any cash you need for the next year or so, may be best held in a savings account for ease of accessibility and liquidity.
I suspect once I’m semi-retired and working part-time in a few years, my cash position beyond 1-years’ worth of expenses could grow. I don’t know. Time will tell. I tell you when my risk tolerance changes on this site!
Some say how much you invest in stocks, bonds and/or cash might be the most important portfolio construction decision any investor ever makes.
Depending on your investment timeline, your need to take on investing risk for reward, and any need for near-term liquidity, you might not need any bonds in your portfolio right now.
Or maybe you do. 🙂
Thoughts on this take? Do you own bonds right now? If not, how are you managing your portfolio – are you using a mix of stocks, dividend stocks and cash or cash ETFs?
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
I’m with RBull, it was interesting to read old the old thoughts and how some of us ambled down similar paths.
Very much so. And things have worked out very well!
Mark
VERY INTERESTING COMPILATION OF VARIED THOUGHTS ON THIS TOPIC….
Thanks, Dale!
Great post Mark. Agree with all you’ve said.
Thanks very much, Deane! Yes, until things change I will keep a bias to stocks and keeping some cash/cash equivalents. 🙂
You’re welcome. Well done.
I know I was active on the original post so thought I’d drop back in, I’m on the path I planned to be on and want to be on for the foreseeable future. Gliding equity path, GICs and cash equiv., pension(s). So far so good.
The equity glide path seems to make a lot of sense once you cross the dangerzone associated pulling the retirement trigger. I would not want to rely on just capital gains, lots of equities, upon day-of retirement. Ideally you want to retire when the market is high but who knows if you can time that?! Ha.
Mark
Good points. A reason I retired with 50/50 equity FI, but also got relatively lucky with retirement timing. Also considered future pension(s) into everything.
Yes, we’re doing the same. With a small DB pension (me) and my wife with some DC pension, we need to carefully consider the timing of all asset drawdowns because things come online at different times.
We continue to believe keeping ~1-years’ worth of cash/cash equivalents to enter semi-retirement in the coming years is smart while dividends and distributions come of out our accounts to cover expenses coupled with any part-time work.
We consider my DB pension income, x2 CPP and x2 OAS income streams as future bonds.
Mark
Ahhh yes, the puzzle! We have the exact same considerations, although work pension was immediate on her retirement, and I did PT 2+ more years after that, in my phase down career which I didn’t really consider retired. Jan 2012-May 2014.
Your plan seems bullet proof to me.
Thanks. It’s really coming down to how much we want to spend. More spending, more work and portfolio needed. Less spending, live more frugal for the coming years, retirement could occur much sooner. Keep ya posted!!
Ha, been there done that. Cheers.
Would you consider bonds at this time?
Nope. 🙂 Buying more stocks now.
Mark
No responses from 2022?
I’ve seen lots of readers reading this post but nope! Ha.
Would you own any now, bonds? Thoughts Bob?
Mark
Hi Mark,
I am in early retirement and have sold enough for my next years spend. The cash from the sale of stocks and dividends are waiting to be deregistered. For tax purposes, I will not be deregistering from rrsp until next year so would you recommend that I leave it in cash or should I use the cash and buy VSB (short term bonds) so that I can get some interest. I know there is a bit of a risk vs just staying in cash. Do you think this is a good idea. Appreciate your thoughts on this.
I can’t offer tax advice TT but I can say that many clients I’ve worked with at my brother-site if you will….Cashflows & Portfolios – happen to slowly wind down their RRSP assets LONG before they have to (age 71).
https://www.cashflowsandportfolios.com/
When they do so, they (clients) tend to leave that deregistered money in cash, inside the RRSP, let it sit, and then take it out at year-end or beginning of the next year. They tend not to sell their assets until about a few months before they need the money out due to opportunity costs – given the stock market – since even a 60/40 split in the market tends to have more “up” days/market tends to go higher over time than down.
There is certainly a risk of staying in cash before you take any RRSP money out but I know many folks avoid moving from equities to bonds to cash and just move asset sales to cash to avoid extra transactions, timing, more things to think about, etc.
I will likely do the same when I begin to wind down my RRSP assets in the coming decade.
Thoughts? Do share. 🙂
Mark
I’m not offering advice either but I looked at the short term chart for VSB and if I had already set aside the cash for next year I would be leaving it as cash at this point.
Ya, that’s my bias personally and what I’ve seen other clients/retirees do – just keep in cash and be ready to withdrawal as needed. Very simple.
Thanks James, nice to hear from you!
Hi,
We are also retired. In this high interest times, I buy a high interest mf in our rbc Direct Investing account. For Canadian $ it is RBF2010 (USD = RBF2014). There are no fees to buy or sell it.
Every month one day before I need the money, sell the month’s amount from the mf. Next day transfer it to checking account.
So if you are not with rbc, then find out if your broker also have high interest options. Or buy high interest ETF.
Thanks, TDW.
I’ve heard from many retirees/semi-retirees about owning some higher-interest funds/cash alternative ETFs. Seems to be a great way to get some income these days with little risk.
Mark
Hi Mark,
I am 100% into equities DGI in particular and would probably not change course anytime soon. I can possibly stomach the volatility of the stock market. I would consider our DB pensions in the latter years to be our exposure to bonds.
You bet. I’ve had the same thinking for many years now too!
https://www.myownadvisor.ca/got-a-defined-benefit-pension-plan-consider-yourself-lucky-then-consider-it-a-big-bond/
Thank you Mark and James. I appreciate all your thoughts on the matter. I do agree that it’s better just to keep it simple.
Thank you for such an informative and thoughtful provoking blog.
Keep up the great work. 👍
I don’t own any bond ETFs after selling off my BMO Aggregate Bond fund, but I wanted to set aside a block of “safe” money as part of a CPP/OAS deferral strategy. I’ve cashed out and taken 200k from our two personal RSP self directed portfolios and opened RRSP savings accounts with EQ Bank, placing 100k in each. The interest rate is 1.25%. The accounts are CDIC insured to the 100k limit. Better than any government bond; totally liquid, competitive interest rate, and about as safe. When my spouse retires next year, the money will be used to bridge a deferral of CPP/OAS to age 70 (4 years more or less) to get it to the maximum amount, giving us about 50k in fully inflation indexed guaranteed income through our 70s and 80s. A company DB pension and investment cash flow from the remaining funds in our portfolio will deliver well over 100k in combined income, a little under 30% of it, the cash produced by the stock portfolio, subject to market risk. With the money set aside now even though we won’t start drawing it until next year, I no longer need to lose sleep over a market crash and can count on 80k a year in perpetuity today.. A 50% crash with a 50% drop in dividend income might drop our cash flow by perhaps 15-20%. No need for bonds.
Nice to hear from you John. Your approach – to keep a modest cash buffer at EQ Bank or other sounds like exactly what I will build with my cash wedge.
https://www.myownadvisor.ca/how-much-cash-should-you-keep/
At the start of semi-retirement in the coming years, I am likely to keep > 1-years’ worth of expenses in cash. It will be CDIC insured at an institution as well for all the reasons you know: totally liquid, readily available, no redemption issues, and completely insured/safe.
Back to you: “A company DB pension and investment cash flow from the remaining funds in our portfolio will deliver well over 100k in combined income, a little under 30% of it, the cash produced by the stock portfolio, subject to market risk.”
That sounds almost bulletproof assuming the company DB pension has no fear of insolvency.
We hope to “live off dividends and distributions” from our taxable account and likely some strategic RRSP withdrawals in our 50s, with some part-time work. I won’t even be touching the TFSA, I won’t yet need CPP or OAS or even my workplace pension which is very likely going to be a commuted value approach in the coming years.
I hope to be like you essentially: “longer need to lose sleep over a market crash and can count on 80k a year in perpetuity today.”
Congrats John on a well thought out plan 🙂
Mark
Thanks Mark. I was originally against doing cash buffers, with all of our funds invested in the self directed dividend portfolio and earning a cash flow of around 6.5 points, with another 2-3 points in capital growth. That plan and taking CPP/OAS earlier would have made guaranteed vs market exposed income streams at roughly 50/50. The economic slow-motion catastrophe created by the lockdowns and wild spending has changed my calculations (we are in much bigger trouble economically than anybody realizes – a depression masked by gov’t borrowing IMHO), led me to follow a safer strategy. This strategy produces pretty much the same income stream as before actually.
My DB pensions (I have 3 pensions through the same employer, via different divisions, that produce modest sums each, but which add up roughly to what a single one would be) were converted to annuities by my employer, with the same terms as they had as pensions, so the exposure there is only life insurance company risk, and the payouts fall within the contingency fund limits for each annuity.
Of course, I’m also putting a lot of faith in the reliability of CPP/OAS in future.
I also have a significant cash position in my remaining SD portfolio, about 10%, and also have a fairly large gold holding, at about 15%, Some Sprott physical, and a large holding of a Horizons bullion ETF (HGY) that sells calls on 1/3rd of GLD shares so you get roughly 2/3rds gold price exposure and also a nice 6-7 point monthly cash stream from option premiums. Gold needs to be regarded not as a spec play but as important disaster insurance. Every investor should have at least 5% in gold/PM related investments and just leave them alone.
I never really thought much of cash wedges and buffers myself until the pandemic reinforced with me how much cashflow + some cash buffer is king.
So, like you maybe, the economic catastrophe still playing out changed my tune a bit. Our government is in dire straits sadly. This election is important.
Given my DB pension must be commuted before age 55 (I will likely stop full-time work there before age 55 – don’t tell my employer!), I will need to move that into a LIRA. Then, hope to “unlock” some given I live in Ontario. I prefer not to take on any insurance risk via a contract/annuity myself.
I’m personally not relying on CPP or OAS per se for my income needs in retirement. It will be gravy. All basic income needs will come from our portfolio. That’s the goal anyhow.
Interesting call about gold. You’re not the first retiree that wants to keep about 5% or so in that as a hedge 🙂
Great comments, thanks for those.
Mark
Great conversation and topic – I understand the role of bonds is to minimize the shock to a portfolio of a serious market correction, and that your risk tolerance should be a balance of your need, ability and willingness to take risk.
I’ve been 100% equities my entire investing career (mid 50s now). I was influenced by my wife who felt that bonds were a complete waste of time given their anemic returns over our investing years. She will have a pension coming, and with CPP/OAS we see a lower NEED to minimize risk. I was 100% in equities in the 2000-2001 tech wreck, 100% equities in the ’08-’09 GFC, and of course last year. Did I panic sell? No, I kept buying. So my ABILITY to take risk is proven. Finally, I’ve been tracking my portfolio value for almost 25 years and despite the corrections along the way, according to the 20- and 30-year returns for the asset allocation portfolios posted on Justin Bender’s site, I could take a permanent 21% market correction and still be ahead of what a 60/40 would have given me. Every year markets advance, this delta grows, so I have strong WILLINGNESS to take risk. I would never advise 100% equity strategies to the people I speak to, but for those who can rationally meet the criteria above, it can make a lot of sense.
Besides, I am beginning to appreciate how much the growing dividend streams will provide money to allow me to enjoy retirement!
That 21% gap was based on investing a block (say $100k), adding nothing and letting it grow for 20-30 years at the different rates in the modeled Vanguard asset allocation ETF returns. https://cdn.canadianportfoliomanagerblog.com/wp-content/uploads/2021/07/Model-ETF-Portfolios-Vanguard-2021-06-30.pdf
After my coffee kicked in, I realized a more realistic scenario would be to start with $10k, add $10k each year and let it grow compounded over those periods. Using the weaker 20-year returns, the delta drops to 8.3% and with the 30 year returns it is 14.4%. Lower, but still a permanent margin of safety. Of course I realize that modelled, annualized returns don’t actually exist in real life (see sequence of returns risk) but for the sake of illustrations they can help show differences like these.
That’s a good link Bart and Justin does a fine job with his site. Margins of safety are important and it’s a big reason why for my portfolio I will be building my cash wedge very soon 🙂
“I’ve been 100% equities my entire investing career (mid 50s now).”
I’m only a decade or less behind you!
With your wife’s pension (re: a big bond per se), and future CPP and OAS – those are very bond-like = fixed income, so I believe (I’m biased, I do the same….) you are smart to be 100% equities.
If you bought during those times, you were smart and likely far wealthier for it.
“I could take a permanent 21% market correction and still be ahead of what a 60/40 would have given me.”
Yup, and this is the opportunity cost with a 60/40 or 50/50 portfolio that folks don’t always understand. The volatility is price you must endure to realize equity rewards. If you can do that, the very strong WILLINGNESS to stay the equity path, you will be wealthier for it.
“Besides, I am beginning to appreciate how much the growing dividend streams will provide money to allow me to enjoy retirement!”
Me too 🙂 It is my hope my taxable account alone (from dividend income) will cover condo fees and property taxes for life. That’s about 30% of my total spending needs in retirement without touching any capital at all.
Hi Mark
Good article on an important topic amid near zero interest rate environment. I hold some corporate bonds, around USD 20’000, which will come due in the next two years. I invested several years ago, it’s parking money and I get at least some return. Certainly more than on my savings account. Bonds as an asset class have been important in the past as passive income source, but today, they have a different role to play in a portfolio (stability, diversification etc.).
Cheers
Thanks Savy! Bonds can be an important asset class depending on your needs and goals. It all starts there I believe 🙂
I ditched my Bonds last year and never looked back but I believe each ones situation is different for us and since we have an income from two rental properties I consider those as bond like income and the income from dividends that we get from our etfs and now our dividend canadian stocks add to that my wife’s db pension there’s no need for us to hold any bonds which I sold and put the money in a TULF portfolio , after reading many books like the “Single best investment” by Lowell Miller and Henry’s “Ever growing Income” it sealed the deal for me 🙂 but i still consider myself as a hybrid investor since I still have 50% in ETFS VTI alone is 32% and 18% btw VCN and VIU .
Income is what makes me more excited then capital appreaciation i guess for me it’s like collecting rent monthly 🙂 something that i paid for and now it’s time to pay me back but Mark like you always said investing is personal so who to say what’s right or wrong the main thing is to save and put your money to work whether in real estate which it worked wonder for us or stocks bonds etfs whatever just don’t spend all your hard earning dollar invest them is something!
I’m a big fan of the TULF stocks as well (telcos, utilities, low-yielding dividend growth stocks/stocks with growth potential, and financials of course). It’s largely been the bulk of my CDN dividend portfolio for about 12 years now.
Beyond that, yup, “hybrid investor” all the way here Gus as you know – owning VTI and QQQ among other low-cost ETFs.
I was a big fan of that book:
https://www.myownadvisor.ca/favourite-takeaways-from-the-single-best-investment-part-1/
So many gems.
“Income is what makes me more excited then capital appreciation” – me too although I’m slowly de-risking my individual holdings now that some FI/FIWOOT goals are very near.
Great comment 🙂
I’ve seen the word “bonds” get thrown around in my finance classes, internet, and personal finance blog posts. I still can’t get over how I can’t buy any bonds though because I don’t really know how. It’s not as easy as putting in a simple ticker symbol like stocks and buying to my heart’s desires.
One day, I will figure out how to do it!
True. Lots of bonds to consider. I used to own XSB and XBB I recall, many, many years ago but long since ditched those.
https://www.myownadvisor.ca/top-canadian-bond-etfs-for-your-portfolio/
David, as Mark referred to it is as easy as a ticker when buying a bond etf. Individual bonds are also easily purchased at least at my diy broker. Sort by type, duration, rating etc and click buy, account, $. Done. Hold to maturity. Known outcome.
I dunno. We’ve got about 5-6 years before retirement and have about 60% of our “minimum terminal value” of investments required to generate the dividends we desire in retirement. With growth, and anticipated savings we should succeed in that goal.
That minimum is somewhat contingent on what will happen with my wife’s DB pension in the interim. Income from her pension is subject to go up a fair bit as more than 50% of her career (to this point) has been part-time work and being a stay at home mom. Finishing her career with 5-6 years of full time employment (at her top pay scale) will significantly raise that component of our retirement income, but for forecasting purposes I only consider what she’ll get as of today, and assume no future work for her.
I think the closest I might come to setting aside significant cash / bonds / GICs is if our portfolio reaches that ‘minimum terminal value” early, or my wife does indeed get those 5-6 years of full time employment, and I can count on a higher retirement income from her pension. In either (or both) of those scenarios I could see turning the DRIPs off ahead of retirement (up to 12 months earlier), and letting that cash accumulate / transfer it (other than from our RSPs), to our EQ savings account.
We have started the process of setting (some) cash aside – for an extended emergency fund that could also be considered a cash wedge for the future. But, other than that, unless GIC / Bond rates once again rise above 4% it’s a tough sell for me – especially considering the tax treatment; because >60% of our portfolio is in a non-registered account, so interest income is very inefficient from a tax perspective.
As Mark well knows from my comments, and some e-mails we’ve shared, my thinking on this is quite dynamic. I would add that if for some reason I hit a couple of investment home runs I could easily convince myself to eliminate risk by switching from equities to other safer opportunities once I know we’ve already secured more than enough dividend income.
I think that’s sort of the crux of this, for me anyway. Until we have “enough” it’s all equities for me – but once we get there I’m totally up for reducing risk.
As always, I really appreciate the engagement on this site!
James, your wife’s pension should be considered “a big bond” in my book. Lots of working assumptions it seems but certainly an opportunity for that great pension/added fixed income in the coming years.
I personally think (I’m biased, it’s my own thinking!) that some cash + eventually, maybe, GICs in our portfolio will be just fine to add to my stocks, low-cost ETFs, pensions, CPP, OAS, etc. I have another 20-years to add OAS. No rush…the portfolio will do the rest in the interim. 🙂
I will absolutely turn off the “DRIP taps” in semi-retirement, live off dividends and distributions for the first 5 or so years in semi-retirement. See how I do. Then, likely start withdrawing from my portfolio since I hope after those first 5 years I have navigated any negative sequence of returns risk.
I am very likely to keep my cash wedge with EQ. One of the best, most liquid, higher interest accounts around.
“We have started the process of setting (some) cash aside – for an extended emergency fund that could also be considered a cash wedge for the future.”
Very smart in my book James!!
I’ve been also doing the same for 15 years = “until we have “enough” it’s all equities for me – but once we get there I’m totally up for reducing risk.” Yup, then onto more asset protection.
Great comment.
Great comment James R.
I retired 7+ years ago and a few years before that started switching up from 95%+ equity to about 50/50 at retirement time. I felt we had enough, and protecting capital was more important for the first 5 years or so of retirement. We are about 70/30 now and we live from pension, Divvys from unregistered, fi wthdrawals from registered. My wife has a pension and retired 2 years before me.
I drip equities in lif, her rrsp, both tfsa’s. I have sold a few equity blocks to rebalance when that allocation was growing too far beyond our target.
Good luck.
I found myself reading this several times and each time I’m nodding and saying “yup” to myself. A factor I *really* like is that there are several options and none of them appear to be detrimental to the situation. IOW, well done!
Great stuff.
Mark
Hi Mark, investors our age have only seen stock market increases and I think leads to an inclination to overly rely on past performance as the indicator of the future. Note that my capital appreciation years are over, I’m not at all swayed by the notion I’m leaving something on the table. In fact behavioral psychology will tell you that people are far more motivated to avoid a loss, or in this case, missing out, than by a decent gain. Classic example.. LOSING a $50 feels a LOT worse than finding one. I’m pretty content to get 7% on my bond fund, because my math says that’s all I need. Leaving higher returns on the table is just not an issue in my overall balanced portfolio..I have equity exposure, but preserving capital and generating an overall acceptable return is my goal. Besides, bashing bonds is currently a popular pastime and my inclination is to avoid what’s popular.
Keep up the good work.
Bill
That must be a long-bond fund right William, re: 7% return?
I’m learning more and more that semi-retirees and retirees seem to have a totally different take on returns. re: they don’t care. They only need returns to satisfy their retirement income needs and nothing more. If that’s 4-5% annualized for some, so be it. It doesn’t matter to them. They’ve “won the game per se” and don’t need to chase equity/stock-market returns. Something for me to think about 🙂
Thanks for the kind words!!
Mark
haha. Guilty.
+1 🙂
👍😎
One bond fund that has worked out for me is the Pimco Monthly Income Fund (PMO505). The share price has not moved much in the year I have had it. The monthly payments vary, but it works out to be around 4% annual return after the MER. I am retired and this seems to be one source of fairly secure income.
I’ve heard of that one Biff but don’t own it of course myself. It will be interesting to see how rates, if/when they do rise, will impact income payments. I certainly prefer my basket of dividend paying stocks over bonds but dividend stocks are certainly not bonds, the income just feels like it sometimes.
Good article (as usual!) and I am with you that I struggle with why I would want to hold bonds.
One suggestion: I think the psychological aspect referred to under point #1 (where you discuss bonds as a “hedge for market volatility”) should be broken out as a completely separate argument for holding bonds. These are two different things…one is the the value of a portfolio is in fact hedged, and the other is that it gives you psychological comfort to stay the course.
Good point Alan. Like dividends (right?), bonds can offer psychological safety in some respects and when it comes to behaviours and finance and investing – that is an entirely different beast to analyze.
Bonds are tough. I want to like bond ETFs but I hate how they change so dramatically with rates. Somewhat reduces their usefullness as a hedge because they get clobbered when rates start rising in ‘good times’. Holding individual bonds could alleviate this, but the spreads on them are poor. So for me, I think a GIC ladder is the best option.
That seems like a good idea as well Loonie re: GICs. I think the past has potentially clouded our future. Bonds did exceptionally well for about 40 years. I personally feel that “run” is over with low rates here to stay.
Hello Mark!
I understand you may be working on some time-sensitive projects 🙂 But I just wanted to follow up regarding an email I sent a few weeks ago 🙂
I’ve been deferring any purchases until I have an idea of your suggestions. My queries were under the subject line “Buying CNR (Canadian National Railway) with a Full DRIP and SPP, within a TFSA”.
Thanks so much!
Wrote you back a very detailed email.
Some links for you and other readers:
I can’t offer direct investing advice but I can say I’m a shareholder of CNR and have been for many years.
I hope to buy more in 2021.
https://www.myownadvisor.ca/5-stocks-i-want-to-buy-in-2021/
Also, when it comes to the TFSA, I believe a self-directed TFSA where you can own ETFs, stocks, etc. is best. The TFSA can be FAR MORE than a savings account once you have an emergency fund in place.
https://www.myownadvisor.ca/great-things-you-can-do-with-your-tfsa/
If you want a FULL DRIP with SPP – yes, you will need to deal with the stock transfer agent(s). There are many kinds of DRIPs.
https://www.myownadvisor.ca/drips/
The idea of the FULL DRIP with SPP is you have invested in a taxable account (not TFSA, not RRSP) and you run those DRIPS with SPP for taxable investing. Not ideal unless your TFSA and RRSP is already maxed out.
https://www.myownadvisor.ca/ive-maxed-out-my-tfsa-and-rrsp-now-what/
This is not advice of course – but you can consider following a path that many bloggers and DIY investors take:
1. open a self-directed TFSA, (I have a good partnership with BMO InvestorLine TFSA that offers cash back – see Deals page), and
2. contribute to TFSA every year diligently, and
3. buy your CNR or other stocks or ETFs there for a buy and hold and buy some more approach over time.
Investing is a get wealthy eventually plan 🙂
Best wishes and thanks Shaw,
Mark
Ill throw this out there.
GIcs have known outcomes but are very rates poor now, and you have to lock in longer term. If you are worried about rates rising and bonds getting hit you will have the same issue with loss of purchase power with gics, and eventually owning ones paying less than current market.
For bond etfs a key is the avg maturity. Shorter duration pays less but is much less volatile. Re the “good times”when rates rise and bond devalues your interest rise will offset this over time as long as you hold as long or longer as the avg maturity. Bonds are maturing, new ones are bought at different prices and yields and it is generally expected to be a wash. Thus, also, etf liquidity is a plus here, but it can also have a cost if sold earlier.
I’m struggling with this right now as I have a 12 and a 14 year old with full RESPs, so I’ve got them not in an extremely bond heavy portfolio, which just feels so counter intuitive. Should I take more risks? Should I switch more of those bonds to GICs or something else?
I don’t know what the right answer is, or if there is one.
I think any teenager for which RESPs were established it remains smart to have some bonds. RESPs likely need to be cashed out around age 17 or 18. An RESP with 100% equities at age 14 or 15 could be disastrous IMO.
I recall I answered a reader question about that and you can see why here. I would be curious about your take Chris!
https://www.myownadvisor.ca/weekend-reading-death-by-powerpoint-bond-etfs-resps-and-more-moneystuff/
I don’t know the rest of your financial situation, and that comes into planning for your kids education. But for us we have one child and he just yesterday started his first year on university. We have an all equity RESP with 160K now for his education. We are retired and living on dividends from an all equity portfolio in all accounts. RRIF, TFSA, and Unregistered.
$160K? For RESP? Impressive DivInvestor.
Chris,
What I did was “guarantee” the value of the RESP by backing it with our HELOC. We put part of the RESP into solid blue chip stocks primarily for the dividends and opportunity for capital appreciation. Collected dividends for a few years and eventually sold at a profit.
If the chosen stocks fell in value, I was fully prepared to cover the difference.
Lets say you bought 20K worth of stock which paid a 5% dividend. Stock cost was $50. That’s 400 stock paying out $1000 in dividends annually. Disaster strikes and stock drops 30% in value. Your 20K is now worth 14K but you collected 3 years worth of dividends so 3K. I was fully prepared to tap the HELOC to bring the core value back to the original purchase price so no value was lost. That cost would have been 3K.
I would not do this with the entire RESP portfolio but if you would go 70% fixed and 30% equity in retirement, why wouldn’t you go the same with an RESP? Especially if you have backing.
If the Equity side tanks for a few years you could always withdraw school costs from the fixed income side, still collect the dividends and wait for the equities to recover. If they don’t recover by the time you need to access the equity portion of the RESP, you still get paid the dividends to wait reducing the amount you are insuring through your HELOC.
Cash wedge, emergency funds and/or savings, should in my opinion be maintained separately from ones investments, except for those investing mainly for capital appreciation. Once we concentrated on investing to grow our income stream, fixed assets, of any kind, were totally excluded from our investment portfolio.
As our investment income increased, during retirement, the amount we kept in cash was reduced. Usually we made the decision to make cash part of our RRIF withdrawal, or not, depending if we planned any major purchases or wanted to gift assets.
We’ve never regretted the decision to totally avoid fixed assets.
I totally get the cash from investments is different but I do believe cash is part of the overall portfolio. Thoughts cannew? Maybe you can post your ideas about that. I see all assets owned as one big portfolio but maybe that’s just me!
I suspect the income (now) generated by your portfolio gives you confidence in the “decision to totally avoid fixed assets”. As it should!
Mark
I look at cash, especially money I intend to spend, or hold for spending , like coin in your pocket, or a piggy bank. You know you have it but don’t really count it. For example, I decided to gift my 2019 RAV4, with 1,695km (yea, I haven’t been using it much) to my daughter, who need a new car, and bought a new one. I paid for the new one out of our savings and will replace the funds in Jan when we withdraw from our RRIF. In other words I spent the money in our piggy bank.
Yes, cash can be a bit of a piggy-bank for sure. We hope to pay cash for our used cars as we get older as well cannew. Or, maybe pay for them via dividends 🙂
You listed my 3 reasons for owning bonds. Although we also have more in cash and GICs as part of our overall FI.
If I was working and receiving employment income with a longer life horizon I would stay 100% equities. In retirement now I choose an asset allocation and work to stay close to that with a gliding (rising) equity path as we age and get closer to CPP/OAS (additional FI). The FI number that’s increasingly more important to me is a $$ amount (number of years spending needs-about 10 years now) instead of a fixed percentage of assets.
We feel comfortable with this approach that handily meets our needs.
Interesting footnote. I have a good friend that has a fair bit of bonds maturing shortly and pondering what to do with the cash. They were from 1992 (30 yr) and paid 9%. Not bad!
Whoa. Wild.
Agree.
My main knock against GICs (outside of rates) is liquidity. One has to build an extensive ladder to get more flexibility.
~85%+ of our FI is outside of bonds now.
Now that’s a case where bonds were a fine idea. I recall my dad having some back in the 80’s paying 15%, when inflation, interest rates were crazy.
I think a mix of cash and GICs can almost or arguably work just as well for bonds. I think anyone striving to live off some of their portfolio, needs to have at least 60-70% equities these days. I believe anything less than a 50/50 stock/bond portfolio might not cut it in the future with low bond yields.
As I get older, the income from my portfolio at a very low withdrawal rate (e.g., even 2.5%) is becoming very important since the only place I see decent returns is stocks. Even then, the sequence of returns is a huge risk hence the cash wedge.
“I think a mix of cash and GICs can almost or arguably work just as well for bonds.”
+1. We have no bonds and went with various terms of GICs in both the RRSPs as well as for our standby funds. I don’t like the thought of the effect a spike in inflation can have on the price of bonds. Now I don’t get bent out of shape over inflation in regards to the actual effect on the portfolio as I consider the CPI to not be an accurate indicator of our personal inflation rate. At our age and financial position, a large safety net filled with soft spongy foam is appreciated. A combination of indexed DB pensions, a still hefty equity position and said safety net make us happy. Not sure why I’d move off of that path at this point in our lives.
I certainly think cash and GICs can be a great way to have FI (fixed income) beyond bond fund or bond ETFs.
Beyond that, I have no doubt that “A combination of indexed DB pensions, a still hefty equity position and said safety net make us happy.”
Smart work in my book and kudos Lloyd.