Investing

Better Off With Bonds Than Stocks: A Decade in Canadian Markets

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  • Dec 22nd, 2019 2:11 pm
[OP]
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Better Off With Bonds Than Stocks: A Decade in Canadian Markets

https://www.bloomberg.com/news/articles ... an-markets
How badly have Canadian stocks underperformed this decade? Here’s the sobering answer: An investor would have done just as well avoiding all the risk and volatility of equities and buying an index of plain vanilla, guaranteed government bonds.
Edit:
A mix of Canadian federal, municipal and provincial government debt returned 94% in the decade following the great financial crisis, as central banks around the world primed the economic pump with lower interest rates. That led to outsized gains for government debt, whose prices rise as rates fall.

The return for Canada’s main equity gauge was remarkably similar, gaining 95% since the end of 2009. That’s less than half the 255% return for the S&P 500 index in the U.S., as Canadian stocks were weighed down by mining and energy companies like EnCana Corp.
Last edited by andrew4321 on Dec 24th, 2019 8:03 am, edited 3 times in total.
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Depends what you exactly were invested in. This is why most people don't invest just in the Canadian market, or just stocks or sometimes don't index. I've almost been 80% Canadian equities and have more than beaten bonds, but then again, I also do individual shares. Also avoided all energy which helped significantly.

In the 2000s, Canadian equities were beating US equities so should one have said at the time the US market is terrible and should have only invested in Canadian shares?

So pretty much yeah sure, but what's your point?
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So: diversity is key?!
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Canadian stocks are a bit over 70% of my portfolio and it was a very good 10 years for me.

I personally don't like index funds for Canada as its too much energy and mining companies. There are a lot of really good companies in Canada that have done well and I think will continue to do well.
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That's the problem when you have an index heavily weighted on natural resources, which is very cyclical. There are 761 stocks on TSX. From every sector. Lots of companies doing much better than bonds. One just need to buy them when fairly valued. A screener that eliminates cyclical business that haven't grown in 5 or 7 years and that has expanded cash flow in the last 5 or 7 years and that are estimated to continue to grow works much better than TSX Composite index or the whole Canadian market.


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Did anyone actually check the figures? When I look I'm getting way higher 10 year returns from a Canadian equity index fund versus a Canadian government bond index fund.
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andrew4321 wrote: Edit: For TSX:
  • close 2009: 12952
  • today: 17118
This decade CAGR: 2.828%.
I assume that does not include dividends?
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andrew4321 wrote: https://www.bloomberg.com/news/articles ... an-markets


Edit: For TSX:
  • close 2009: 12952
  • today: 17118
This decade CAGR: 2.828%.
Wow... that stands out like a red flag to a bull. You did not include dividends. Considering the dividend yield of the TSX is around 2.8% that's a significant error.

Stryker wrote: Did anyone actually check the figures? When I look I'm getting way higher 10 year returns from a Canadian equity index fund versus a Canadian government bond index fund.
Here's some numbers I kluged together from two different sources: Stingy Investor Asset Mixer for 2010 to 2018, and iShares returns for XIC and XBB for 2019 YTD to Nov 30. And for simplicity I fudged it a bit by calculating a 10 year CAGR over 9 years and 11 months - but the same fudge on both asset classes so probably not significant. Appreciate if someone could check my calculations.

Norm Rothery's wonderful Stingy Investor asset mixer tells us that $1000 invested in 100% all Canadian bonds at the start of 2010 would be worth $1426 at the end of 2018. And iShares YTD return as of Nov 30/19 for XBB is 8.13%. So $1426 x 1.0813 would give $1542. $1542/$1000 = 1.542. Take the 10th root of that and you get 4.4% CAGR for bonds from the start of 2010 to Nov 30, 2019.
Here's a link to the Asset Mixer: http://www.ndir.com/cgi-bin/downside_ad ... D=Canadian

The same asset mixer tells us that $1000 invested 100% in the TSX at the start of 2010 would be worth $1587 at the end of 2018. And iShares YTD return as of Nov 30/19 for XIC is 22.3%. So $1587 x 1.223 = $1940. $1940/$1000 = 1.940. Take the 10th root of that and you get 6.8% CAGR for TSX from the start of 2010 to Nov 30, 2019.
Here's a link to the Asset Mixer: http://www.ndir.com/cgi-bin/downside_ad ... D=Canadian

So 4.4% CAGR for Cdn bonds, and 6.8% CAGR for TSX. And with stocks giving $1940 and bonds giving $1542, stocks have a 25.8% higher end value after not quite 10 years.

Even just eyeballing the annual returns for XIC vs XBB for past 10 years it's not hard to think that Canadian stocks have outperformed bonds. That article is kinda vague on exactly what indices were used and how the calculations were done.

Again if some kind soul could review my numbers it would be appreciated.
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Data from StockCharts.com
- they are quite accurate for the most part, but always subject to verification.

- click on image to enlarge.

10-year XIC XBB.png
[OP]
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Deepwater wrote: Here's some numbers I kluged together from two different sources: Stingy Investor Asset Mixer for 2010 to 2018, and iShares returns for XIC and XBB for 2019 YTD to Nov 30. And for simplicity I fudged it a bit by calculating a 10 year CAGR over 9 years and 11 months - but the same fudge on both asset classes so probably not significant. Appreciate if someone could check my calculations.
XIC - iShares Core S&P/TSX Capped Composite Index ETF only includes 70% of the total market capitalization on the Toronto Stock Exchange (TSX) and only 250 stocks out of 1500. You also have tracking error due to capping.

Do your calculation using actually TSX index as reported by the Toronto Stock Exchange and not aproximative proxies. There are currently no ETFs that match the S&P/TSX Composite Index.

For 2009-12-31, un-adjusted close on TMX is 11,746.11 and that means 3.84% CAGR, not including dividends.
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And for a simpler view, let's look at the benchmark returns for XBB (Canadian bonds) total return and XIC (TSX stocks total return) from iShares web pages for those two ETFs.

You can see here under the 10 year average annual return the benchmark for XBB (FTSE Canada Universe Bond Index) returned 4.28%

And you can see here that the 10 year average annual return the benchmark for XIC (S&P®/TSX® Capped Composite Index) returned 7.16%

I believe the differences from these numbers to my previous post is due to using 10 years in this example vs. 9 years and 11 months in my previous example, and the 1 month different starting point.
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IrwinW wrote: Data from StockCharts.com
- they are quite accurate for the most part, but always subject to verification.

- click on image to enlarge.




10-year XIC XBB.png
17118 / 11746.1 - 1 = 45.73%. Your chart shows 98.83%. XIC only includes 16.6% of the TSX stocks.
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andrew4321 wrote: 17118 / 11746.1 - 1 = 45.73%. Your chart shows 98.83%. XIC only includes 16.6% of the TSX stocks.
Choose whichever index, benchmark, ETF you like.
Will make no difference to how I invest.

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From the OP's source:

"An investor would have done just as well avoiding all the risk and volatility of equities and buying an index of plain vanilla, guaranteed government bonds."

"A mix of Canadian federal, municipal and provincial government debt returned 94% in the decade following the great financial crisis, as central banks around the world primed the economic pump with lower interest rates."

The closest I can see to a Canadian Government Bond Index is iShares Canadian Government Bond Index ETF XGB and it's cumulative 10 year return is 43.61%, not the 94% mentioned in the article.

https://www.blackrock.com/ca/individual ... -index-etf
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andrew4321 wrote: 17118 / 11746.1 - 1 = 45.73%. Your chart shows 98.83%. XIC only includes 16.6% of the TSX stocks.
  1. The values you state are for the S&P TSX Composite Index, which is what XIC attempts to track. Perhaps you are referring to the all the stocks traded on the TSX when you say XIC only holds 16.6% of the TSX stocks. But you listed the index values for the TSX Composite Index, not all the stocks on the entire TSX exchange.
  2. You are calculating the change based on price return of the index only, which does not include dividends.


https://en.wikipedia.org/wiki/Total_return_index
A total return index (TRI) is different from a price index. A price index only considers price movements (capital gains or losses) of the securities that make up the index, while a total return index includes dividends, interest, rights offerings and other distributions realized over a given period of time. Looking at an index's total return is usually considered a more accurate measure of performance.
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