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RBF1005 Bond Fund

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  • Oct 16th, 2019 10:34 am
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[OP]
Member
Jun 7, 2013
202 posts
99 upvotes
Toronto

RBF1005 Bond Fund

I purchased the RBF1005 bond fund on Oct 4th at $6.936 since which time it has dropped 1.75% to $6.8151. I thought bond funds were on the very low risk for investments. The market has gone down, yet the bonds are as well. Is this normal at all? Thank you for your help.
4 replies
Deal Fanatic
Jul 1, 2007
8483 posts
1584 upvotes
You thought bonds were very low risk and now you learned that they're only somewhat lower risk in relation to stocks. Bonds fluctuate in value, just as stocks do, because they are traded every day and their prices reflect prevailing interest rates. When interest rates go down, bond values tend to go up and vice versa. If the stock market is doing well, generall (though not always) the economy is doing well and interest rates are on the up trend, so bonds will perform poorly. And the vice versa is generall (though not always) the case.

If you desire safety, for example if this money is for a very short term need, then the only choice out there for you is a high interest savings account, which pays a low rate of interest but doesn't fluctuate.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
Deal Addict
User avatar
Feb 1, 2012
1561 posts
2276 upvotes
Thunder Bay, ON
When you say it dropped 1.75% is that price only or total return? Bond funds have two components to the return: price change and distributions (mostly interest). This has been a bad couple of weeks for bonds. But XBB, which is a very broadly based Canadian bond ETF is up 6.83% YTD to Oct 14, and 9.62% for 1 year as of Sept 30. 10 days is far too short a time period to evaluate an investment.

Bonds and bond funds are complex. They move opposite to interest rates. But the Bank of Canada rate and Prime rate are short term rates. It is possible for short term rates to go up when long term rates fall. So you can't necessarily judge a bond fund's trend by looking at the BoC rate. Here are some links that will help you understand:
https://canadiancouchpotato.com/2017/04 ... ates-rise/
https://canadiancouchpotato.com/2018/07 ... ing-badly/
https://canadiancouchpotato.com/2017/04 ... ing-money/

Note that when interest rates go up, your bond fund may drop in value, but as older bonds mature and new higher rate bonds are added, the yield will start to rise. Somehow GIC investors understand that and cheer higher rates, but bond investors fear the same thing.

Also note that RBF1005 has a MER of 0.66%. That's a big handicap for an actively managed bond fund manager to overcome.

It will help to look at your overall portfolio return over at least one year, instead of each individual holding. That way you avoid agonizing over each holding's returns. Stocks typically have higher growth with high volatility. Bonds have lower growth and lower volatility. Both can have negative returns, but that will happen much less frequently with bonds than with stocks. Stocks let you eat well; bonds let you sleep well.

Edit: corrected to show that 9.62% is for 1 year, not YTD.
I solemnly swear, to never assume I have an inkling at which direction the market will head, and to never make any investments based on a timing strategy.
[OP]
Member
Jun 7, 2013
202 posts
99 upvotes
Toronto
Thanks for the help. The total return was (-1.75%) in a very short time and still dropping. Is it a good idea to hold bonds at all?
Deal Addict
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May 11, 2014
4626 posts
5497 upvotes
Iqaluit, NU
ChipsAway wrote: Thanks for the help. The total return was (-1.75%) in a very short time and still dropping. Is it a good idea to hold bonds at all?
First of all you have not stated anything about your investment objectives, goals, time frame or anything, so answering this question is impossible. You are focusing on the change in price in a couple weeks which does you no good. What exactly are you doing with this money? What is this money for? Is there a time frame for this money? What is your risk tolerance for investments?

There are few possible things here.

The fund itself is not appropriate for your situation because you are intending to use these funds in the short term future. If say you are going to use the money for a purchase next year, get out now. While bonds are less risky than stocks, they are still long-term investments that can go down as well.

You could have a behavioral issue. This could be either that your risk tolerance is so low that any aberration downward is making you scared. This might be due to incorrect expectations (you heard bonds are "safer" so you expect bonds to never go down in price) or you are the type that can't let time invest your money (eg. you are checking price changes every other day). If your funds are for long term purposes, my advice would be to learn more about investments and get yourself comfortable understanding how they work. Also understand the problem with safe investments in that often they lose value after accounting for inflation. We can help you with that if this is the case.

Start off with stating how old you are, where you placed this money (eg. non-reg, TFSA, RRSP etc.), annual income , and your overall goal with this money. This will help people to actually answer appropriately whether the fund it good for you or not. Do you also have other funds/investments you haven't stated?
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