Adding Bonds to an Equity Portfolio?

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frankrom
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Adding Bonds to an Equity Portfolio?

Post by frankrom »

Hi Everyone,

I am still relatively new to managing my own investments. I have built a 100% equity portfolio but now I may want to begin adding some fixed income assets. Needless to say my experience is surrounding equities and not bonds or other fixed income.

I was wondering if anyone had any suggestions on how or what type of fixed income should be added? How do you even add bonds to a self directed account? Do you buy bond ETF's off the exchanges? Any specific recommendations?

Thanks,

Frank
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Re: Adding Bonds to an Equity Portfolio?

Post by Quebec »

see finiki first: The simplest solution is to buy and hold a low-MER broad market Canadian bond ETF from one of the top-3 providers (Vanguard, BMO, Blackrock/Ishares). See bond ETFs for specific ticker symbols. These 'plain-vanillla', fully diversified ETFs include bonds from the federal govt, provinces, and corporations, with a range of maturities.
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Re: Adding Bonds to an Equity Portfolio?

Post by frankrom »

Why just Canadian? Isn't there a benefit to having a mixed bond ETF maybe North American bonds?
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Re: Adding Bonds to an Equity Portfolio?

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frankrom wrote: 05 Dec 2017 14:22 Why just Canadian? Isn't there a benefit to having a mixed bond ETF maybe North American bonds?
You have huge currency risk with ex-CAD bonds. Fixed income is supposed to provide your portfolio with some stability and/or decrease volatility. Your global bond holdings will look terrible if the loonie increases a mere 5% or so against the greenback. Remember the loonie has varied from about 65 cents to $1.10 over the years. If you look at some of the sharpest money managers in the world, e.g. the Mawer folks as one example, and look at the constituents of their Balanced mutual fund MAW104, you will NOT find virtually any ex-CAD bonds. There is a reason for that.

If you truly want ex-CAD bonds, you really need to hedge the currency risk and the cost of hedging will be a major drag on the performance of ex-CAD bonds.
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Re: Adding Bonds to an Equity Portfolio?

Post by Peculiar_Investor »

AltaRed wrote: 05 Dec 2017 14:31
frankrom wrote: 05 Dec 2017 14:22 Why just Canadian? Isn't there a benefit to having a mixed bond ETF maybe North American bonds?
You have huge currency risk with ex-CAD bonds. Fixed income is supposed to provide your portfolio with some stability and/or decrease volatility. Your global bond holdings will look terrible if the loonie increases a mere 5% or so against the greenback.
Absolutely concur. Take your risk on the equity side of your asset allocation, not the fixed income portion.
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Re: Adding Bonds to an Equity Portfolio?

Post by frankrom »

AltaRed wrote: 05 Dec 2017 14:31
frankrom wrote: 05 Dec 2017 14:22 Why just Canadian? Isn't there a benefit to having a mixed bond ETF maybe North American bonds?
You have huge currency risk with ex-CAD bonds. Fixed income is supposed to provide your portfolio with some stability and/or decrease volatility. Your global bond holdings will look terrible if the loonie increases a mere 5% or so against the greenback. Remember the loonie has varied from about 65 cents to $1.10 over the years. If you look at some of the sharpest money managers in the world, e.g. the Mawer folks as one example, and look at the constituents of their Balanced mutual fund MAW104, you will NOT find virtually any ex-CAD bonds. There is a reason for that.

If you truly want ex-CAD bonds, you really need to hedge the currency risk and the cost of hedging will be a major drag on the performance of ex-CAD bonds.
Well put.... understood.
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Re: Adding Bonds to an Equity Portfolio?

Post by Thegipper »

frankrom wrote: 04 Dec 2017 11:53 Hi Everyone,

I am still relatively new to managing my own investments. I have built a 100% equity portfolio but now I may want to begin adding some fixed income assets. Needless to say my experience is surrounding equities and not bonds or other fixed income.

I was wondering if anyone had any suggestions on how or what type of fixed income should be added? How do you even add bonds to a self directed account? Do you buy bond ETF's off the exchanges? Any specific recommendations?

Thanks,

Frank
For myself I would never hold a bond outside of a registered account. After taxes and inflation you would be lucky to have your head above water. Holding US bonds is a good question. I am retired and spent 5 months in the USA. So I hold US bonds in my RRIF and use it to cover my US time. For me this reduces the exchange rate concern. Unless you have such a purpose I would avoid US bonds. In a non- registered account I would be looking at preferred shares over bonds. The yield is superior and the dividend tax credit gives you very good tax treatment. Preferred shares have a fair degree of risk so you have to know what you are buying. Being a subscriber to the blog from Mr Hymas would be a good start.
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Re: Adding Bonds to an Equity Portfolio?

Post by Koogie »

Thegipper wrote: 07 Dec 2017 09:03 For myself I would never hold a bond outside of a registered account. After taxes and inflation you would be lucky to have your head above water.
Consider where the OP might be in their investing cycle (accumulation phase,not withdrawal phase) For myself, I would never waste registered account space that could grow for 30+ years on bonds.
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Re: Adding Bonds to an Equity Portfolio?

Post by ockham »

Koogie wrote: 07 Dec 2017 09:33
Thegipper wrote: 07 Dec 2017 09:03 For myself I would never hold a bond outside of a registered account. After taxes and inflation you would be lucky to have your head above water.
For myself, I would never waste registered account space that could grow for 30+ years on bonds.
A word of caution. In the early '90s, in my registered accounts, I was buying 10-15 yr provincial strip bonds yielding 8-10%. In retrospect, but certainly not at the time, it's obvious I should have been buying terms that were longer still. Those same strips also helped stop me from making stupid decisions in the two early 21st century equity meltdowns. An equity meltdown in a registered account is especially painful.

It's those registered account strips that are now the foundation of peace and serenity in retirement.
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Re: Adding Bonds to an Equity Portfolio?

Post by Koogie »

ockham wrote: 07 Dec 2017 11:39
Koogie wrote: 07 Dec 2017 09:33 For myself, I would never waste registered account space that could grow for 30+ years on bonds.
A word of caution. In the early '90s, in my registered accounts, I was buying 10-15 yr provincial strip bonds yielding 8-10%. In retrospect, but certainly not at the time, it's obvious I should have been buying terms that were longer still. Those same strips also helped stop me from making stupid decisions in the two early 21st century equity meltdowns. An equity meltdown in a registered account is especially painful.
It's those registered account strips that are now the foundation of peace and serenity in retirement.
Again, it would depend on the timescale that the OP has. The longer the timescale, the less a meltdown in a registered account would matter.
Depending of course on the risk appetite the OP has (which seems to be high). And assuming they are a buy/hold investor.
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