Personal Finance

Buying bond ETF now?

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  • Aug 8th, 2011 2:18 pm
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Member
Dec 14, 2005
259 posts
328 upvotes

Buying bond ETF now?

I'm setting up a couch potato portfolio, and part of that involves allocating some money into fixed income, ie. bonds. With the low interest rates and the inevitable hike in rates (who knows when) that would make buying bonds now a bad idea?

What are your opinions in putting that money into a GIC until bonds crap the bed and become cheaper? Will it be worth it or should I just dump my allocation into bonds now and fogettaboutit.
30 replies
Deal Addict
Jul 8, 2009
2028 posts
482 upvotes
Edmonton
I say create the right asset allocation for you and if that includes bonds, then put it in and fagetaboutit. Market timinng doesn't work. I'm probably way older than you are and don't really have any significant allocation to bonds but if they're for you, do it. Isn't this a long-term thing? Bonds are portfolio insurance.
Deal Addict
Apr 21, 2008
1753 posts
1902 upvotes
Wing Nut wrote: I say create the right asset allocation for you and if that includes bonds, then put it in and fagetaboutit. Market timinng doesn't work. I'm probably way older than you are and don't really have any significant allocation to bonds but if they're for you, do it. Isn't this a long-term thing? Bonds are portfolio insurance.

So do u not hold bonds or term deposits at all? That's an interesting strategy if so.

I know I read a study that stated having 30 to 40 percent in bonds provided better long term gains then having less than 30%. Than of course im sure i could find a study that said the exact opposite. Point being....the internet is confusing.
Deal Fanatic
User avatar
Dec 21, 2005
5865 posts
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London, ON
preferred shares and/or convertible debt

more upside than bonds but obviously more risk
💡😃😂😄
Deal Addict
Nov 15, 2010
2043 posts
793 upvotes
Ottawa
DanP wrote: I know I read a study that stated having 30 to 40 percent in bonds provided better long term gains then having less than 30%.

I'd love to see that study because I don't think that's true. Bonds have a long-run return approximately 4% lower than stocks (not sure about the exact number). Maybe the study looked at risk-adjusted return? Then it might be true.
Banned
May 20, 2008
227 posts
13 upvotes
Ontario
pricerror wrote: I'm setting up a couch potato portfolio, and part of that involves allocating some money into fixed income, ie. bonds. With the low interest rates and the inevitable hike in rates (who knows when) that would make buying bonds now a bad idea?

What are your opinions in putting that money into a GIC until bonds crap the bed and become cheaper? Will it be worth it or should I just dump my allocation into bonds now and fogettaboutit.

Bonds = fuhgedaboudit.

Here's a simple question ... why do you think bonds are now the "it" thing to invest in (by the average Joe)? Hint: average Joe is always the last one in.

Gold and silver is to fixed income as a blow torch is to a candle flame.

Do your homework.
Deal Fanatic
Jul 1, 2007
8569 posts
1763 upvotes
For anything longer than a 20 year time horizon bonds are only cosmetic. Makes your portfolio fluctuate less and you s**t the bed less during bear markets, at the cost of lower long-term returns.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
Deal Addict
Nov 15, 2010
2043 posts
793 upvotes
Ottawa
mplsv wrote: Bonds = fuhgedaboudit.

Here's a simple question ... why do you think bonds are now the "it" thing to invest in (by the average Joe)? Hint: average Joe is always the last one in.

Gold and silver is to fixed income as a blow torch is to a candle flame.

Do your homework.


Good point, the average Joe definitely isn't buying gold or silver :rolleyes: .
Member
Jun 7, 2009
259 posts
9 upvotes
If you're gonna buy bonds, buy the actual debt instrument.
Minimum $5k to buy, I recommend short-term, investment grade bonds.

mutual funds and etfs will drop in price value once interest rates go up, but for $5k bonds just hold until maturity.
Member
Jan 26, 2011
233 posts
14 upvotes
Coquitlam
Didn't see your point. Let's simplify it a little bit:

Say there is a mutual fund A whose holding is: 100% bond B.

A and B will both drop in value once interest rates go up.

If you hold until maturity, they will be worth the same (not considering the MER).

I heard if you buy bond directly, you get a much worse price than the institutions. Also hard to buy corporate bond. Haven't done my research on these.


sslaw wrote: If you're gonna buy bonds, buy the actual debt instrument.
Minimum $5k to buy, I recommend short-term, investment grade bonds.

mutual funds and etfs will drop in price value once interest rates go up, but for $5k bonds just hold until maturity.
Member
Jun 7, 2009
259 posts
9 upvotes
hoveran wrote: Didn't see your point. Let's simplify it a little bit:

Say there is a mutual fund A whose holding is: 100% bond B.

A and B will both drop in value once interest rates go up.

If you hold until maturity, they will be worth the same (not considering the MER).

I heard if you buy bond directly, you get a much worse price than the institutions. Also hard to buy corporate bond. Haven't done my research on these.

Bond mutual funds and bond etfs are a collection of bonds piled together.
When you buy these mutual funds/etfs you own a small percentage of various bonds.

Corporate bonds (the actual debt instrument) can be bought from brokerages (Questrade, ScotiaiTrade, the 6 big banks) for a minimum of $5k each.

When interest rates go up, all bond prices drop to a varying degree.
When you own the actual debt, you just hold onto it until maturity to avoid the drop in bond price (you get your principal and interest payments back to re-invest in whatever you want).
For bond mutual funds and etfs, there are no maturity dates (when the bond matures in these funds, they are used to purchase more bonds within the fund). In order to get your money back, you have to sell at a loss (you lose some of your principle due to the drop in bond price, but you get a bit more interest usually).

Hope this makes more sense.
Newbie
Jan 2, 2009
49 posts
2 upvotes
sslaw wrote: Bond mutual funds and bond etfs are a collection of bonds piled together.
When you buy these mutual funds/etfs you own a small percentage of various bonds.

Corporate bonds (the actual debt instrument) can be bought from brokerages (Questrade, ScotiaiTrade, the 6 big banks) for a minimum of $5k each.

When interest rates go up, all bond prices drop to a varying degree.
When you own the actual debt, you just hold onto it until maturity to avoid the drop in bond price (you get your principal and interest payments back to re-invest in whatever you want).
For bond mutual funds and etfs, there are no maturity dates (when the bond matures in these funds, they are used to purchase more bonds within the fund). In order to get your money back, you have to sell at a loss (you lose some of your principle due to the drop in bond price, but you get a bit more interest usually).

Hope this makes more sense.
It should be noted, if you decide to sell your bonds before the maturity date... there is a market rate for them, just like ETFs/mutual funds. This can result in a nice little captial gain, as a bonus, or they may sold at a loss. Have a look at prices when the earthquake in Japan happened...

An advantage of an ETF or mutual fund (if the MER is not criminal)... you can diversify the types of bonds (corporate, government, foreign government, junk) you have access to.

With all the world events happening... owning fixed income is a good idea.

Personally, unless you're about retire, I wouldn't be picking and choosing bonds individually. And, make sure you hold them in something tax sheltered (TFSA first, RRSP second).
Banned
May 20, 2008
227 posts
13 upvotes
Ontario
eiad77 wrote: Good point, the average Joe definitely isn't buying gold or silver :rolleyes: .

You think the average Joe has a clue? Why do you think the average Joe is buying bonds? Sheep follow, not lead.

If the sheep had a clue, more would have been in gold and silver long ago:
http://www.kitco.com/charts/popup/au3650nyb.html

No worries, average Joe will be buying near the peak, as usual, and will have missed out on the real money ... after wondering why they ever bought any other fixed income vehicle that, if at all, barely offered any real rate of return after inflation.
Member
Jan 26, 2011
233 posts
14 upvotes
Coquitlam
In my post I simplified the holding of a mutual fund to 100% bond B. You could make it 50% bond B and 50% bond C, maybe with different maturity dates, if you want. That does not change the story:
If you are to hold a bond to maturity, it does not matter whether you hold it directly or through a mutual fund.
sslaw wrote: Bond mutual funds and bond etfs are a collection of bonds piled together.
When you buy these mutual funds/etfs you own a small percentage of various bonds.

Corporate bonds (the actual debt instrument) can be bought from brokerages (Questrade, ScotiaiTrade, the 6 big banks) for a minimum of $5k each.

When interest rates go up, all bond prices drop to a varying degree.
When you own the actual debt, you just hold onto it until maturity to avoid the drop in bond price (you get your principal and interest payments back to re-invest in whatever you want).
For bond mutual funds and etfs, there are no maturity dates (when the bond matures in these funds, they are used to purchase more bonds within the fund). In order to get your money back, you have to sell at a loss (you lose some of your principle due to the drop in bond price, but you get a bit more interest usually).

Hope this makes more sense.
Member
Jun 7, 2009
259 posts
9 upvotes
hoveran wrote: If you are to hold a bond to maturity, it does not matter whether you hold it directly or through a mutual fund.

Bonds in mutual funds don't mature per se, the bonds that mature within a fund stays in that fund - it automatically reinvests your money into the fund whether you like it or not.
Actual bonds, you get the money back and can choose to buy more bonds, or anything else you want.

For simplicity, one can just buy bond funds and ride out the drop in bond prices.
But if you need that money in a year, then you should buy the actual bonds and avoid interest rate fluctuations (kind of like GICs, but with more risks).

tmtu has more good points about bonds.
Deal Fanatic
Jul 1, 2007
8569 posts
1763 upvotes
mplsv wrote: You think the average Joe has a clue? Why do you think the average Joe is buying bonds? Sheep follow, not lead.

If the sheep had a clue, more would have been in gold and silver long ago:
http://www.kitco.com/charts/popup/au3650nyb.html

No worries, average Joe will be buying near the peak, as usual, and will have missed out on the real money ... after wondering why they ever bought any other fixed income vehicle that, if at all, barely offered any real rate of return after inflation.

You make a good point and that is exactly what is happening in the realm of bonds and bond funds... anyone buying them is a sheep who is following. But couldn't the same be said about precious metals?
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
Banned
May 20, 2008
227 posts
13 upvotes
Ontario
Thalo wrote: You make a good point and that is exactly what is happening in the realm of bonds and bond funds... anyone buying them is a sheep who is following. But couldn't the same be said about precious metals?

Look at it this way ... what percentage of the investing public do you think is in bonds vs. precious metals? My guess is far more in bonds, as the sell of safety, security, low risk, blah, blah, blah is easier to unload vs. volatile, remember-the-crash-in-the-early-80s, did-nothing-for-two-decades, blah, blah, blah.

My view is that average Joe still doesn't believe in gold and silver despite what has transpired over the past decade. Just look at how-would-you-invest-45k-rrsps-1021421/ ... post #13 ('armyguy') and you'll see how they've missed the last decade completely, arguing nonsense.

The charts don't lie. Look at the 3 and 5-year returns for leading precious metals funds:
http://biz.yahoo.com/p/tops/sp.html

Look at the last decade in gold:
http://www.kitco.com/charts/popup/au3650nyb.html
Member
Jun 7, 2009
259 posts
9 upvotes
I think any investment vehicle, whether they be bonds, equities or commodities will have their bull cycles and bear cycles.

Will bonds take a beating once interest rates go up? Yes (which is why I'm saying one should stick with the actual short-term bonds till maturity should one decide to buy bonds, to avoid drops in bond price).

Equities also have risks too, if the global economy gets spooked due to inflation, soverign debt, financial liquidity issues, China popping like a bubble, etc, it'll drop.

Commodities can also drop if emerging markets start to cool-off due to inflation or if China's real estate bubble bursts.

Investors need to manage risks, whether they're in bonds, equities or commodities.
(inflation affects everything of course).
Sr. Member
Nov 8, 2010
963 posts
214 upvotes
mplsv wrote: The charts don't lie. Look at the 3 and 5-year returns for leading precious metals funds:
http://biz.yahoo.com/p/tops/sp.html

Look at the last decade in gold:
http://www.kitco.com/charts/popup/au3650nyb.html
I agree, the charts don't lie. If you bought at the peak in 1980 you still haven't made a profit at today's price when you take into account inflation.

http://www.goldprice.org/gold-price-his ... gold_price


You don't think all of this nonsense about "How gold has to keep on going up" and "It's just beginning of the bull market in gold" wasn't all the talk in 1979 and 1980? That turned out well didn't it.
Banned
May 20, 2008
227 posts
13 upvotes
Ontario
FlyingOctopus wrote: I agree, the charts don't lie. If you bought at the peak in 1980 you still haven't made a profit at today's price when you take into account inflation.

http://www.goldprice.org/gold-price-his ... gold_price


You don't think all of this nonsense about "How gold has to keep on going up" and "It's just beginning of the bull market in gold" wasn't all the talk in 1979 and 1980? That turned out well didn't it.

Typical response. If you understood markets, you'd get it. Using your FAILED analysis, the suckers who bought at the peak in the Nasdaq are waaaaaaaaay underwater and those who bought at the Dow's peak have made NOTHING. Gold and silver, on the other hand have EXPLODED.

Instead of looking at the bear cycle in gold, look at the bull market for the decade-plus run BEFORE 1980 ... funny how you conveniently ignore THAT.

This bull run is not over, as that bull run wasn't over in 1975 or 1977.

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