Tuesday, February 14, 2012

Second Look: Long-term Investing in Bonds

Writing this blog has taught me a lot about personal finance and investing. This is one of a series of articles where I argue with my former self by disagreeing with one of my previous articles. Unlike politicians, I’m allowed to change my mind as I learn more from my readers and my own research.

In a post on asset allocation, I wrote
“I’m still searching for a rational reason to invest in bonds for the long term.”
Over the years I’ve softened my position on bonds to some degree. I still don’t own any bonds myself except for cases where I know I’ll need money available in less than 5 years. My long-term savings are still 100% in stocks. However, I’ve come to appreciate that so few investors are able to control cycles of fear and greed that it is practical for almost all investors to consider including bonds in a long-term portfolio.

I considered the stock market crash of 2008-2009 to be a good test of my ability to remain calm and rational. I didn’t sell stocks and even managed to find a little cash in various accounts to buy more. In addition, I slept just fine. However, many people who were invested in stocks sold low and many more had sleepless nights as they worried about their financial futures.

On some level, it is very rational to recognize your limitations and choose an asset allocation that allows you to sleep at night. Of course, you should stick to this allocation in good times as well; it is no good to allocate more to stocks in good times and less in bad times because this is just buying high and selling low.

We all have our weaknesses. My wife and I don’t keep potato chips and cookies in the house because I know I would eat far too many of them. Choosing to have a healthy allocation to bonds to avoid losing your cool and selling everything can be quite sensible, even if it isn’t for me.

On the Positive Side …

Here are a few of my older articles that I still quite like:

When investing in an RESP, see how a 20% Canada Education Savings Grant (CESG) can be consumed by a mere 2% MER.

Investing is definitely not like surgery, no matter what the financial planning industry says.

Here is an attempt to explain how volatility hurts investment returns with a minimum of math.

Leaving notes in the box when returning defective merchandise to help the next sucker.


  1. I don't own any bonds either. Since I have a defined benefit pension, I'm quite comfortable with 100% stock allocation.

  2. I don't invest in bonds either, but am not certain that my assortment of stock index funds is the best diversification. I have mostly large cap, with some mid cap, small cap and international added in, but would welcome any comments on recommended percentages.

  3. @Echo: DB pensions are definitely a nice anchor for any portfolio.

    @Tara: There are many different opinions on allocation percentages. You might try going to canadiancouchpotato.com and look at the model portfolios.

  4. I have some bonds in my RRSP. That's about it. Like Echo, if you have a DB pension, I don't see much use for bonds in your portfolio.

    I consider my DB pension very bond-like.

  5. I will only hold bond funds like fay.un or xhy etc. fay is my fav now, paying me 10.7%. I wish someone could explain how you make $ when some bonds (on cibc) cost $105 to $120. As I understand them I get $100 back at maturity. Now I'm no math whiz but????...
    How is this a safe place to put money?

  6. @Stu: I haven`t spent much time looking at high-yield bond funds, so I don`t have an opinion about the funds you mentioned. But, I can see your concern about the low yields on government bonds.

  7. I haven’t invested in bonds for some time. Interest rates are too low. I am fully invested in stocks and it does not bother me a bit. Perhaps because I have been though some market crashes in the past and have come out just fine.

    Bye the way, Warren Buffets recently talked about bonds being among the most dangerous asset. See Warren Buffet.

  8. @SPBrunner: I saw the Buffett's remarks about stocks, gold, and bonds. I've tried to explain why I think that stocks are less risky over the long run, but as usual, Buffett thinks and writes more clearly than I do.