Why Bonds?

Who's preaching bonds? Not me. I'm a 100% equity man. With the time horizon U mentioned, go Equities, equities, equities if U have the stomach for it and can ride out a Bear market.

What I think some others have said on this forum is to go the bond route for less risk adverse types. It has a cushioning affect.

It's like the old story. Give an Canadian a dollar & he (she) will likely say, "Where can I invest it safely". Give an American a dollar & he will say, "Where can I get my best return?"

How do U think? Like an American or a Canadian?

Bylo:

Madelyn's website and newsletter should be required reading for all FP's, as well as for individual investors.She's definitely a clients-first FP.

Now I'm blushing again. Thank you Bylo, and Rick...well, if I thought about what kind of reputation I want to have,...that's it. Thanks.

RK, as Bylo said, the website explains my views. If you want to look at 15 years, the period from Jan.1982- Dec.1996 is an interesting one. Long bonds averaged 14.6%, and Can. equities averaged 11.3%

If we look at a longer time, I have 1938-1996 at my fingertips, on a rolling 15 year basis, bonds returned on average 5.1% and Can. equities 10.2%. It strikes me that it depends on what 15 year period you look at, but you be the judge. If you had a 70/30 allocation your average return on any 15 year basis would be 9%, with much less volatility. You sacrifice 1.2%, but probably save a lot on Maalox.

both Templeton and PH&N last night said that a realistic expectation from stocks is 10%. A good bond or bond fund should give 7% minimum. Is a 3% difference worth risking your capital??? All the good news is in on stocks, restructuring , write offs etc. the downside is more obvious than the upside.

The bonds guy at PH&N (Michael Borden as I recall) said last night that he expected their bond fund would no longer be able to generate double digit returns, but he thought 6% to 9% returns would be realistic.

Thanks Bylo, for Madelyn's site. And Rick, I agree!

George & Bylo, did Templeton and/or PH&N also give their views on equity market outlooks in contast to the bond markets? As in say specifically where we ought to go?

Bylo. did you get the impression that they were prematurely apologizing for poor performance in '98.. Personally, I got the impression that it might be a time for conservatism in the near term, but if you are not concerned about the next 5 years, stay with equities. Frankly, I went into bonds and a small weighting in income trusts, 30% cash. Call me a coward, but....

LOL. Madelyn's comments are right on:

>If we look at a longer time, I have 1938-1996 at my fingertips, on a rolling 15 year basis, bonds returned on average 5.1% and Can. equities 10.2%. It strikes me that it depends on what 15 year period you look at, but you be the judge. If you had a 70/30 allocation your average return on any 15 year basis would be 9%, with much less volatility. You sacrifice 1.2%, but probably save a lot on Maalox. <

You should also consider that overall asset mix is a consideration, and where Bonds (or fixed income) has a place in the portfolio, keep them in the RRSP, to the extent it is possible and the equities (again as much as you can) outside the RRSP - this is most tax effective and can provide additional tax deferrals outside the RRSP, if done correctly. OTOH, in the case of fixed income in the RRSp, I favor strip coupons - this way I can easily manage a well-tailored average-term-to-maturity strategy.

As an example, I reorganized my strips early this year in my own RRSp and extended term to about 08 and at the same time averaged 7.25% (net of commish) - a bit aggressive at the time, but it has worked out real well, now that rates out there are so much lower .... just lucky I guess.

Warren.

Madelyn:

Bylo said that you are well respected in this forum. Well, I agree with your comment about which 15 years period, you are looking at especially the previous 15 years.

What about the next 15 years??

Reg seems bullish with equity. I do agree with Reg for the next 15 years. Are you with us??, or do you still favor bonds??.

RK

RK, "What about the next 15 years??"

Your original question asked, if in the long term equities outperform them, why anyone ought to own bonds.

It's interesting to note that in the last 15 years we've had very large swings in interest rates (remember when CSBs -- yes, CSBs -- paid 19.5% interest?) and massive run-ups in stock prices yet bonds have managed to return 50% more on average.

Since no one knows what the next 15 years will bring, a prudent investor ought to have a significant portion of their portfolio in bonds.
(A DIYFP's opinion.)

Jacquie, I didn't attend the Templeton meeting, but from press reports they are finding better bargains outside the US. They are (slowly) moving their investments into selected countries in Europe, Latin America and the Far East. Call Templeton and ask them for an audio cassette of the meeting. Mine arrived while I was on vacation. I haven't had a chance to listen to it yet.

George, I didn't get the impression PH&N apologized for anything -- not even for their untimely investment in Bre-X! That a sharp guy like Ian Mottershead (1996 MF Manager of the Year) could get sucked into a Bre-X only serves to underscore the need for a broadly diversified and balanced portfolio.

Bylo:

Let me rephrase my question (15 years horizon):

1. Historically how many times in the PAST does Bonds outpace Equity?

2. Statistic that Madelyn provided (ist it TSE, or SP 500) which is true for North America. What about Europe, Asia who have different demography.

3. Looking at demographic study for North America from 1982-1996(the year Madelyn quote that Bond excel Equity), show that the Boomers were busy housing their families, and did not have money to save. Now the Boomers are in different phase...they are in saving mode. That's what I like Madelyn, and Bylo to comment. Do you still include Bonds for portfolio with 15-20 years horizon.

4. Madelyn comment about 1.2% return sacrifice for stomach ulcer!!. I don't have to point it out to you (since you are FP) that 1.2% different over 15 years is LOTS of money. You may be able to afford to retire few years early.

Where are you Madelyn??

I am waiting for your comment.

RK

Bylo, maybe apologize was the wrong word or in the wrong context, but I have left both Templeton and PH&N's meetings with the pronouncement that a 10% return on equities should be expected for the years ahead. The Walll street Journal carrird an excellent article pointing out that a lot of the profits over the last few years have resulted from creative accountingand cannot be duplicated. Bonds, in my opinion, are a safe harbour for those desiring preservation of capital and for market timers. More agressive investors may wanta 60-30-10 mix. All investors should revisit and rebalance their portfolios, taking profits as necessary. Reg made an excellent point, narrow the risk parameters to meet the time and money objectives if that is appropriate.

RK, re "Do you still include Bonds for portfolio with 15-20 years horizon."

FWIW due to hot stock markets in recent years my asset allocation is now down to about 40% fixed (bonds, bond funds and MMF/cash) and about 60% in equity MFs. My investment horizon is at least 15-20 years.

BTW I sleep well at night and I don't use maalox.

Where do I call for the Templeton Cassett. I'm in a little village far from Toronto. THANKS

Bylo:You are correct to point out that the last 15 years bonds outpace Equity, I suppose this is due to the high interest rate (19.5%) which came down now to around 4%(prime is now 4.75%). Therefore Bonds made lots of money. Do you think we are going to see that 19.5% interest rate again in the future(15 years).
What make you think that bonds is going to perform?. Do you think interest rate is still going to go down from where we are now? (I was taught that bonds is inversely related to interest rate).
If you have even a slight theory( speculation, evidence, a hunch or...what ever you want to call it) that bonds has a chance to perform, I may want to follow Madelyn, and your foot step...and include considearble Bonds in my portfolio!!
RK

RK,

You are correct that bond prices change inversely to interest rates.

While interest rates dropped substantially at times during this 15 years period there were also times when rates went up substantially. Bond prices saw considerable volatility -- they even dropped year-to-year in 1994.

On top of this the past 15 years has seen one of the greatest equity bull markets in history (maybe even the greatest?) yet during that same period bonds managed to outperform stocks by a wide margin.

I'm not saying that bonds will necessarily continue to outperform stocks. Frankly I have no idea what the future will bring. That's why I've spread my portfolio's assets (and risk) between them.

RK, I do not "favour" bonds...I favour appropriate asset allocation that optimizes returns at a tolerable risk level.

I personally don't know what will happen in the next fifteen years. You seem to have decided that equities are the place to be. Based on your demographic theories, why not put 100% of your portfolio into AIC Advantage Fund?? It certainly has done well over the last 10 years, and why take less return in a more diversied fund?? You might be able to retire early???...or you might not.

In the meantime, my clients & I will continue to diversify, and include a fixed-income element in our portfolios.

During 1994 Canadian Bond funds certainly tested the stomachs of investors. However, many who hung in during the dive realized gains of up to 20% after bonds fought back. There is a lot of excellent advice of this thread and hopefully newcomers to mutual funds realize that bond funds can be volatile at times as they were in 1994.

In my opinion, saying equity will return 10% and bonds 7% is wrong.

You must develope the scenerio for a 10% equity return then look at where interest rates will be. Fix the P/E ratio between 20 - 25 and the market would be at 14000+ in seven years. Do you believe corporate earning can double and wages stay flat. Assuming 3 year union contract negotiating sessions, the unions would have to buy into management's song and dance story about why they should not get an $$ increase through 2-3 bargaining sessions. I'm in management and this is very unlikely. I think management won't have any new arguements after the current round. A higher wage increases inflation and interest rates.

Economists say boomer demand for money is what drove up interest rates. If wages stay flat and corporate earning increase yearly and double in 7 years, corporate demand for money for expansion will exceed anything the boomers may have caused.

My guess is that the economy will expand and interest rates will increase.

Here is an idea! Keep the rates low until the federal budget is partially paid down then raise them just in time to kill the plans of boomers who thought they could retire @ 55 in a low inflation environment.

In 10-15 years when half the population is 55-60 the government could artifically create the situation for increased rates. Investor added income would also increase government clawbacks and be taxed at 50%.

Someone please tell me i'm wrong!!

A question from a novice:

If equity markets go DOWN (or even if there's a suspicion that they will go down ... or even if hordes of investors decide to diversify into fixed-income) and investors pull out, where will the dollars go?
Wouldn't there be a demand for bonds (at a lower return, to be sure, but better than a bear market)?
Wouldn't bond prices then go UP?
Wouldn't that happen even though interest rates didn't fall?
Wouldn't that mean that supply&demand ALSO drives the bond market (not just interest rates)?

gummy, you dummy, this thread is addressed to FINANCIAL PLANNERS!!

and I am obviously not an FP.

Bond prices and interest rates are ONLY driven by the market.

When the bond prices go up the interest rate comes down.

They is no fixed function of bond prices starting with some government bond or Fed. decision. Governments and National Banks are just players and their input is depending on their volume, but National Banks influence is much greater on the short term rates.

Governments role is usually overrated. Think about attempts of all G7 nations to influence a currency rate, the markets are so huge these days and trends just develop.

If there is a dominant stream of funds in or out of bonds the government rates and repo rates will follow this trend rather than the other way arround.

Last week I went to a talk given by Dunnery Best. He explained a lot of economic graphs etc and concluded that in today's enviornment wage increases will not affect inflation and interest rates. Sorry, I didn't take notes on this so I can't spout verbatim why things will be different this time round. He also said that good quality bonds are in short supply and will become even more scare as governments are no longer needing to borrow so much money. This will make bonds more expensive and thus have lower yields.

If anyone else heard him talk please feel free to add to the above. I wrote down a whole bunch of stuff but didn't imagine that I would be trying to repeat any of this to anyone! By the way his talk was excellent!

Just had to add my 2 cents even though I'm not a planner either. Forgive me Gumby :-)

Last week I went to a talk given by Dunnery Best. He explained a lot of economic graphs etc and concluded that in today's enviornment wage increases will not affect inflation and interest rates. Sorry, I didn't take notes on this so I can't spout verbatim why things will be different this time round. He also said that good quality bonds are in short supply and will become even more scare as governments are no longer needing to borrow so much money. This will make bonds more expensive and thus have lower yields.

If anyone else heard him talk please feel free to add to the above. I wrote down a whole bunch of other stuff but didn't imagine that I would be trying to repeat any of this to anyone! By the way his talk was excellent!

Just had to add my 2 cents even though I'm not a planner either. Forgive me Gumby :-)

You're forgiven (... but gummy ain't).

Katie, like Duneery , I agree that Bonds will have a lessened supply which could affect its value. The demand for Bonds could also increase as the conservatism of an ageing population will drive them to vehicles with a predictable cash flow. Paul Martin intends to allow the CPP to be invested into the markets, creating more demand pressure as a portion of this will be put into bonds. the main argument for bonds however is that none of us are infallible and a portion of your assets need to be in a variety of vehicles in case you are wrong and parts of the market turn south. Personally, I am overweighting in bonds as a defensive/preservation mechanism , in case the market goes south. The same reasoning applies to all classes, including Golds, it is Insurance. Opinion only, not an FP, bit I am an economist by education and a curmudgeon by nature.

Had to look this word up Howard. No objection.

This is a kinder, gentler Howard, Jurgen. No Comment.

Howard,

Is your overweighting in bonds a temporary move while you look for a market corrrection?

If so why buy an asset class that also presents a high probability of capital loss. Correlation to stocks has historically been quite high. I think that the value of bonds as some sort of hedge or as stabilizing component in a portfolio is highly over-rated.

Asset classes are usually most attractive when they look the least attractive. If i was looking for a safe place to park money it would only be in t-bills.

It is a defensive move until I see what happens in the last quarter. I also believe that it will be very hard for the market to continue up without going down first. Some advisore also feel that bonds will outperform this year, so all in all, I think of this move as insurance. Don't get me wrong, I still have a good chunk in the market, but in direct stock holdings as opposed to funds. Free cash is with ING making 4%.

RSC, you could argue that the probability for capital loss is greater for equities right now. Should stock markets take a sudden beating (ie-15-25%), bonds will be the place to be because cash will flow in from equities. In fact, the short term return on bonds (if you're farther out the yield curve) could make up for a lot of your equity losses. If you're afraid of an outright crash you should consider them.

The risk of course with bonds right now is that markets will gradually drift lower as a result of a few rate hikes or earnings disappointments. In this scenario, rate increases could offset any price gains resulting from new money coming into fixed income.

Bonds are not risk free (otherwise you wouldn't earn more than t'bills) but they do offer much in the way of diversification and especially reduced volatility.

Madelyn,

Advice to put 100% to AIC Advantage offcourse is silly. Nobody would do it. You would not be stupid enough to invest in 1 country (Canada).

But if you put 100% in equity globally(internationally) say your portfolio now has breakdown of 35% Can, 35% Europe, 10% USA,5% Asia, 3% Japan, and 2% Emerging NOW, you can ideally now sell your Can, USA shares with DCA method and buy the area that is down...i.e: Asia, Japan in the next 2 years with DCA method. That way you takes away the quessing game.

I do not know as well what the future bonds and interest rate will be. But I do know that Asia/Japan would not be in this situation forever. It may be that in 2 years the reverse may happen (Asia boom, and Can will be bust), then the logical action will sell Asia and buy Can (the reverse).

You do some quessing game on how Bonds and interest etc. will behave in the future, and concentrate your brain on CANADA, and USA market. Why not guess on Equity, but consider globally??

Is my view short-sighted??

Reg, You are 100% equity man. What is your view. Please comment and contribute.

RK

RK, I agree with Peter Lynch in putting my monies in areas I understand. I do not agree that it is necessary to diversify into parts of the world outside of Canada, if you understand your own market. Many times mutual fund companies use overseas indices to sell their funds, when equally good returns could be made at home with quality products. I would like to see these oversea funds publish the real changes in local currencies, because many times most of the gains are due to currency fluctuations not real stock gains. New Zealand was the darling, but now it has lost 10% of its exchange rate vs US dollar, the results are not nearly so impressive. I still believe sector rotation within Canada is a less risky path to better than average gains. Like I said, anyone who is 1005 of anything is not investing, they are gambling. Opinion only, not an FP.

RK,

I get the impression that you had already decided on 100% equities when you posted your original query and you were merely looking here for approval.

Now, despite the consensus (one exception) from amateurs and pros alike that a well-balanced portfolio ought to include bonds, you still seem to be trying to get us to help you justify the all-equities position. Am I missing something?

i s this like when our wife pays $ 500 for a dress on sale, then asks us what we think?

Mine buys two at half price and then justifies it on the basis that she saved twice as much! (Of course I never use similar justifications for my purchases.)

You to, Hey Honey, look at how much money I saved you. Go ahead, save me some more. What's this got to do with Mutual funds. absolutely nothing, slow day, even volumes on market are slow. Stock investors, go visit Pfizer.com and then maybe you will understand why I am so high on this company. A pill to turn a 50 year old into a stud, a safe pill for weight reduction, a pill for PMS so there are no excuses. Aint life grand.

Bylo:Thanks for your comments. You are right that I have so far invested in 100% equity. I am not trying to get approval from you or anybody that contributed to this thread, however I am trying to find an answer to statements that contradict one another:1. Most FP often said Equity (on AVERAGE) outpaced bonds in long term. Most FP also advise that small difference in performance (even 1%) in 15-20 years equal to TONS of money.
2. Yet I don't understand well is why FP would recommend to include bonds when faced with young clients who has over 15 years ahead of her/himself.
Is safety (of bond) worth the while for the sacrifice of million of $ 15-20 years from now?.
If there is a factor other than safety that bonds have, I would consider them in my portfolio. However if it is just to save maalox or sleep, I would pass, since I am not affected much by market fluctuation.
Thanks anyway.
RK

RK,

If there is a factor other than safety that bonds have, I would consider them in my portfolio. However if it is just to save maalox or sleep, I would pass, since I am not affected much by market fluctuation. Thanks anyway.

If I were a betting man, I'd bet that you haven't been investing for too long.

Like I said in a previous thread, we see many people talking about 100% equity during a good bull run. I would like to hear these cocky 100%ers talk in the middle of a 1-2 year bear market with no end in sight.

jd, we have to get this sorted out.

I think there are 2 (two) jd's on the forum. Here is the test: Do you play a FP on TV and if where?

Once again, asset allocation is just in case your wrong money. If you put all your money in Precious Metals in 96/97 you were probably feeling pretty good, but the bloom is off the rose. when you have significant assets, why increase your risk element if you are at or close to your goal. No one is right all the time, so in the long run it is better to be diversified because you never know when you may need to liquidate. By all means, put all your money in kazakstan gold mines if that makes you happy, but since there seems to be a lot of knowledgable investors giving you a warning on a 100% equity, they may have had some reason to. Your money, opinion only.

jurgen,

There is only one jd (formerly, John K and John). I'm currently in an upcoming contract dispute with the producers of Traders so I am off the air for a while. I'm asking for more naughty scenes with Sonja Smits but those executives are playing hardball - they want monetary concessions.

money is not everything ...

Hi RK, Although I'm a 100 equity man, I'm also at the stage where I'm conserving assets. Equities don't do that. They help aquire assets. To me at this stage of the game, preservation of my asets is crutial. Having said that, I like Madelyn's comment: I personally don't know what will happen in the next fifteen years. You seem to have decided that equities are the place to be. Based on your demographic theories, why not put 100% of your portfolio into AIC Advantage Fund?? It certainly has done well over the last 10 years, and why take less return in a more diversied fund?? You might be able to retire early???..

Reply: Thanks Madelyn, I think that's exactly what I'll do with my next leveraged purchase. I think I'll be around for at least another 15 years and I don't have to sacrifice any of my capital. How does that sound Howard? Take a Risk & still preserve capital.

I haven't dropped dead for the last 15 years so there's no need to plan for it during the next ...

RK, you asked a question, and you have received the answer,...but you choose not to hear it.

You also said "You do some quessing game on how Bonds and interest etc. will behave in the future, and concentrate your brain on CANADA, and USA market. Why not guess on Equity, but consider globally??"

Hmmm. First of all, I don't play guessing games when it comes to investing. Secondly I don't concentrate my brain on Canada and the US market. Thirdly, I do consider and buy global investments, ...I just don't guess.

And yes, the notion of a 100%AIC Advantage portfolio was silly,...it was not advice, but a comment to make a point...which you apparently did not understand.

Bylo's quotes above make the point clearly.

Reg...don't do it!;-)

Gummy, in 50% of the cases the first indication of a heart attack is Death.

Aahh Madelyn, but how else can I get to the next stage: OPULENCE. 8-) ;-)

Jd,
You guess wrong. I have invested in MF starting 1985 (so it is almost 13 years). I have never been out from equity even once, (even during crash Oct 1987). I contribute max to RRSP, and invest monthly ousite RRSP for the whole 13 years. My total portfolio is now in 7 figures. I am 40 years old, I want to retire age 55 to 60, so I have 15-20 years to go. There you go Jd... you know me slightly better now, I am not new in this investment game.
Madelyn, Bylo, Reg and others.
I thank you for all your advices. I posted this thread to create 2 ways discussion. That's mean I am allowed to express my opinion to be critized by all of you. My statement is not meant to insult anybody, but to stimulate ideea, and fish out wisdom from you ,FP.(hopefully as much as possible)
I do get something out from it. Bonds provides safety, decrease fluctuation of performance, preserve capital(Reg said) etc. etc.., but it also decrease performance (Madelyn quoted ... may be 1.2% if bonds is included).
My statement also did not mean to show that I choose not to listen(like Madelyn said).
I do listen to what all of you said, but choosing to implement your suggestion is for me to decide.
I don't think I am in bad situation with the size of my portfolio which I am sure I will not touch till I retire. I do budget for expenses (holiday, emergency, kids education etc. etc.) outside this investment portfolio.
I finally want to thank you for all the contributors. If I was rough or insulting to anybody I apologize. I do listen to all of you, however decision to buy Bonds nor not, unfortunately is for me to do.
This thread is getting long, and the value of bond investing has been repeated many many times by many contributors. Unless there are any other good features about Bonds that I should know, I would suggest we all move to different topic.
Thank you again everyone.
RK

You guess wrong. I have invested in MF starting 1985 (so it is almost 13 years). I have never been out from equity even once, (even during crash Oct 1987). I contribute max to RRSP, and invest monthly ousite RRSP for the whole 13 years. My total portfolio is now in 7 figures. I am 40 years old, I want to retire age 55 to 60, so I have 15-20 years to go. There you go Jd... you know me slightly better now, I am not new in this investment game.

And that is why I am not a betting man. :-)
But as I mentioned on another thread, the wealthy can afford to take more risk than us common folk. RK has the resources to weather a very heavy market storm w/o having to worry about the everyday worries I would have to face. In your position I would probably undertake a similar strategy.

The wealthy are wealthy because they do not take unnecessary risks. Bonds are for everyone, at some time during their investing career, they become the logical choice for cash flow and for preservation of capital. It has to happen, at some point you liquidate, crystallize gains, and start spending your money. So the question is not If, but When. My opinion only, and the Good Lord knows, I have been castigated many times before. No Jurgen , you can be castigated and still have children, different word.

So you are not castrated. Well this would not be subject anyway.

Castigate:

1. to criticize or reprimand severely.

2. to punish in order to correct.

Did it work?

Howard,

I would take issue with your last post. The wealthy become wealthy because they usually take huge risks early in life. The wealthy usually run their own business which is certainly a riskier career strategy than becoming, say, a salaried employee.

The wealthy spend a smaller portion of their wealth on consumption than do the lower income classes so they are in a more advantageous position to weather an economic downturn. I'm talking about the rationally behaving wealthy individuals, though. That may not apply to you :-)

JD you sound like a Jerry white commercial. First, define Wealth. I know many people who are worth a million plus, got it by working for others not themselves, but that may not be your idea of wealth. I know people in my neighbourhood who have 2 million dollar homes, but do not feel wealthy because the house across the steet is 3 million. Am I rationale, I certainly believe so. Am I wealthy, I guess it depends on your perspective. Most of the people I know are also very judicious in the handling of their money, a trait I am afraid I don't see in many people. I always brown bagged my lunches, my secretaries invariably ate out. Their choice, my choice. Running your own business is more risky than working for someone else? Tell that to those people who have been downsized. at least when it's yours, you are the only one who can fire you.

at least when it's yours, you are the only one who can fire you.

In a small business it's usually your customers who fire you. (if not your banker -- if you have one -- or even RevCan.)

Nevertheless, after over 10 years of being my own boss (please, no one tell my wife...) I'd never go back to corporate life.

Howard:

"Bonds are for everyone, at some time during their investing career, they become the logical choice for cash flow and for preservation of capital. It has to happen, at some point you liquidate, crystallize gains,"

You are right if you are close to retirement. The thread is posted if you still have over 15 years horizon.

Thanks for your comment.

RK

True RK , but if you walk in Monday morning and they announce the company has been sold and report to personnel, there go your 15 years. I retired early because I felt since I had enough money, I should move on and let a younger person move in. I stiilbelieve that you should exit if you are financially able to give our youth a chance to raise families. The people I left behind two years ago have now been informed the company has been aquired and they will be employed until December. Most are in their 30's, so much for long term planning!

Howard,

You are right again, but your comment may not be applicable to me.

I am the owner of my business, I can not be fired. The only way I can be out of job, is due to accident. I have covered that possibility with enough disability, and life insurance for me and my family to cover for 20 years.
"wealthy" is having more asset than AVERAGE people of the same age, and living the same country. If you are FP, you know how much other people have on average within the same age catagory.

Anyway this is out of the main topic!!!!.
RK

Wealthy is having enough money that you can buy what you want, and not worry about paying for it. Some people are content with Australian(like me ) wines, others just must have Chateau La Fitte Rothschilde. Whatever makes you happy. Word of advice RK, don't listen to your customers. Them you already got, listen to those who aren't your custmers to learn why not. And you thought i was just a pretty face.

RK, I suggested that you choose not to listen, because you keep asking the same question in a different way.

"If you have even a slight theory( speculation, evidence, a hunch or...what ever you want to call it) that bonds has a chance to perform, I may want to follow Madelyn, and your foot step...and include considearble Bonds in my portfolio!!"

"1. Most FP often said Equity (on AVERAGE)outpaced bonds in long term. Most FP also advise that small difference in performance (even 1%) in 15-20 years equal to TONS of money. 2. Yet I don't understand well is why FP would recommend to include bonds when faced with young clients who has over 15 years ahead of her/himself."

Well, we just told you that during last 15 years bonds outperformed stocks. We also said we do not have a crystal ball, and cannot tell you what the next 15 years will bring. So...we allocate a portion to bonds...just in case. It certainly worked well during the last 15 years.

You are right,...it is your decison. I wish you luck!

Madelyn:

You told us that bonds outpaced equity in last 15 years. This is only true for North America market (can, USA). Do you have stats on UK market, HongKong market, Germany,Netherland, France and others market (emerging market) ?? Do they have the same conclusion??.

If you are globally diversified, and has stats on your finger tip, you notice that your conclusion is not applicable all over the world.

In general with exception of north america(and few others) Equity outpaced Bonds in last 15-20 years.

You are right.. that bonds need to be considered for every portfolio considering each person situation.

May be I am different than most of people, and may be because I am different, it get me where I am now. I will consider bonds in the future.... there.. I am listening to you with open ear.
RK

RK if you had just left your money in Swiss francs you would have outperformed the TSE over the last ten years. Asset diversification is for what if your wrong money. If you strongly believe in your investment and want to go 100% into it, go for it.

Hi Howard & the rest that mentioned wealth here.

Wealth is a matter of perspective. I remember when I lived in a basement apartment for years & despite not owning a stick of furniture at the time felt rather well-off. I lived in a house & had the use of the back yard for BBQ's etc. I also rented the garage since the people I rented from where older & stopped driving. I was also centrally located Bathurst & 401. I could be in downtown TO, out in the country, in Weston (Mom lives there) or in Scarborough in about 20 minutes. My car was paid for. I had a relatively good job back then & NO debts. I did what I wanted & had enough money to travel. I felt rather well-off.

Now, looking back approx 20 years, I can see how little I really had. But one thing I still have that is more valuable then money. TIME. How I spend my time now is far more important to me than how I spend my money. Accumulating enough money in a relatively short(er) period of time allows one to be master of their destiny (more or less).

Money $$$ buys freedom. Hopefully, when one reaches that stage they will also be mature enough in order to spend both their money & time wisely.

No one can put a dollar value on what true wealth is.

Reg,

"Now, looking back approx 20 years, I can see how little I really had. But one thing I still have that is more valuable then money. TIME."

Reg, don't forget HEALTH.

RK

money can't buy poverty.

True RK. Thankfully I have that also. I suppose I sort of took it for granted because I hardly ever get sick. I realize that I shouldn't.

I was very active in sports & was a jogger ever since high school. I ran the Eaton's 10 K race through Toronto regularly until my accident. My L knee was injured badly. I can no longer run, ski, play hockey or other stenuous sports but I can still GOLF. Thank God for that. And as anyone who knows me, I do a lot of that.

Howard, I didn't know poverty was up for sale. 8-)

"I've been rich and i've been poor, and rich is much better" forget whose quote that is.

... I think it was Reg's ...

RK, if I might be so bold,I submit that you are not different, but indeed, the thinking of the general public these days.

All I can say, is to repeat what Madelyn said,...good luck.

Reg, I did my PB at that Eaton's run, 42.27. I still like Bonds especially with the returns I made these last two weeks, two days after switching from Equity. I am now going out of Funds and buying those with two to three year maturities, following advice from Successful Investor.

Hi there! Been reading this thread with interest and altho' it seems to be running on the spot -- there has been change afoot in bonds recently. Was just reading an article by Frank Armstrong on the Moringstar site -- he recommends 2 yr. short term bonds only (the rest are too risky for the rate of return) -- I've heard this before recently. Yet I've also heard that bonds are yielding 4% above the rate of inflation - twice the historical rate (hence a good deal) How do these ideas fit together?

On another point -- when one is considering asset mixes shouldn't you consider all assets.

For instance - I own my home and receive rental income -- the house represents a little over 1/3 of my assets (35%) and produces about 6.5% gross per year.

I also own a mortgage (16% of my assets) and produces 7 3/4% per year

In other words 1/2 my assets are in income producing products.

With these kinds of considerations does it still make sense to buy bonds?

I've thought not, am I mistaken?

gj,

Ian McKinnon, head of Vanguard bond funds (nearly $100B in assets) said basically the same thing last night on Wall Street Week. He also said the marginally higher returns of long bonds and also of junk bonds are not even close to compensating for the significantly higher risks.

gj:

If you aren't close to retirement, bond funds are used to reduce portfolio risk to your optimum level, and to hold and preserve gains you've made in equities. From that perspective, you make most of your money from equities, and you aren't too concerned about what bond funds return, since that isn't what they are there for. A short term bond fund is sort of ideal for this, you get some of the stablity of a MM fund, and you get some of the return of a longer term bond fund.

I agree with Bylo re: taking into consideration your entire investment portfolio. But e.g your house is not a very liquid asset, and you have to make sure that if the equity market tanks for a few years, you have enough cash inflow so that you aren't tempted to sell your equity funds, and you have enough $ waiting in bond funds to take advantage of equity buying opportunities.

Thanks, Bylo, for the link. I don't know if Armstrong provides regular columns on this site, but I've bookmarked it to check it out. One point here: I recall reading not so long ago that as compared to their U.S. counterparts, the cycles of stocks and bonds in Canada are less closely correlated.

Bylo,

I've been considering working toward a DIYFP designation. What are the qualifications?

Randy.

Good question, Randy!

Bylo, I pulled a February 15, 1997, FP article by Rudy Luukko from my files. He reports a 0.71% correlation between the S&P 500 and the TSE 300. This compares with a 0.46% TSE 300 correlation with the Morgan Stanley EAFE index.

In the course of the article Luukko comments on “the remarkably high degree of diversification” achieved by combining Canadian stocks and bonds in the same portfolio.

The correlation of the TSE 300 with the Scotia Capital Markets universe bond index, he reports, is only 0.19, “very low for a stock-bond correlation within the same country.”

Just to toss in a couple more stats: TSE correlation with global bonds is 0.14 percent; with small caps (Nesbit-Burns index), it’s 0.89%.

BTW, I'm just starting in the BSFP program.

Ray W,

Thanks, I think that's the article (well I hope it's the right article 'cuz the 0.71 correlation proves my memory ain't failing after all!)

I searched the FP site earlier but couldn't find it in their archives. Could you post the URL here?

Sorry, Bylo, no URL. I just have the clipping on good old newsprint.

Bylo/Brian Thanx for your thoughts --- I'm going thru Armstrong's book even now. I saw the McKinnon spot -- I also noticed he himself was invested entirely in equities altho' he wasn't putting any new money into them! In the end wasn't McKinnon saying let what you've got ride and anything new buy nothing but ST Bonds? Difficult advise to follow!

One apparant requirement for a DIYFP designation is spending your nights, weekends and holidays staying current. You forgot that one, Bylo. :-)

Randy.

Randy,

Certainly that helps a lot, but as a buy-and-hold investor I simply ignore the daily ups and downs of the market, the pontifications from Greenspan, Thiessen and all the other "experts", etc.

Sure I read and surf voraciously, but I do that because I enjoy it -- not because I'm nervous or trying to time the market. Hey, some of the drier stuff even helps me get to sleep faster too!

The article is no longer on the FP website (at least not on the original URL), but here's the table ("All correlations based on returns in C$ over the 10 years ended 31Dec96. Source Ibbotson Assoc."):

	TSE300	NBCSC	S&P500	EAFE	Em Mkt	SUB	WB
TSE300	1.0	-	-	-	-	-	-
Nesbitt Burns Cdn Sm Cap	0.89	1.0	-	-	-	-	-
S&P 500	0.71	0.59	1.0	-	-	-	-
MSCI EAFE	0.46	0.41	0.47	1.0	-	-	-
Emerging Markets	0.35	0.36	0.35	0.32	1.0	-	-
Scotia Universe Bond	0.19	0.02	0.13	0.05	-0.11	1.0	-
World Bonds	-0.14	-0.21	0.06	0.41	-0.22	0.14	1.0

Bylo, I may not always agree with your postings but I do find them informative and educational, keep it up. As for bonds, I am 50%bonds, 30% cash, the balance in shares, predominately Pfizer or small cap funds. I may miss the market top, but I know I will be ready for the inevitable buying opportunity whether it's 5 or 20% below current levels. late Oct or earlt Nov seems to make sense, all those brokers locking in performance to get ready for the 98 market. 98, trend will be up, but not at the same slope we have got used to. 98 will see which fund manager knows what he/she are doing, definitely a stock pickers market. Opinion only. Shorter term bonds, interest rates will eventually move up, the signals are too clear.

Bringing this up for the 100% equity thread people. We've been down this long road.

Thanks Jack, it will take me awhile but I will go through it all.

Will I stay the course?

YES