The big elephant in the room continues to be: Market Uncertainty, more than ever before.

Perhaps another approach could be as taken from a suggestion by National Bank’s Andy Filipiuk who suggests a way of hedging against the big four investment uncertainties: inflation, deflation, recession and prosperity, by incorporating the following into an all-inclusive portfolio:

25% XSB, 25% XRB, 10% CPD, 20% XIN, 20% GLD

Of course this doesn’t entirely address interest rates rise, and seems rather risk aggressive as it relates to a Retiree and his limited time horizon. Perhaps some sort of modification may bring it into spec? The original blog post’s Retiree portfolio example seems to incorporate several of these features. However, again long bonds may become a problem for future income sourcing.

I think it may be time for a post about bond funds and ETFs, as many readers seem confused about how they work. Will get to it as soon as I can!

In regards to #6, please explain what you mean by “in bond funds, your principal is not guaranteed”. Ignoring the fact that your principal is never actually guaranteed even with direct ownership (default is always a possibility), I’m not sure that I understand.

Bond Funds hold bonds to maturity (ignoring the redemptions of others). Assuming that you’re planning to hold bonds to maturity, how exactly is the behaviour of your entire bond ladder different from the price of the fund? The only issue I see is if you plan on making a withdrawal; it’s possible that interest rates have gone up (fund value has dropped) and the value of the weighted average of your units is less than the face value of the ladder rung about to mature.

Come to think of it, with a long time horizon, why bother with an explicit bond ladder (e.g., CLF) when diversification and higher gains are more appropriate (e.g, XBB)? With a short time horizon, why use a bond latter fund (CLF) when you require a yearly withdrawal (principal or interest) and want to avoid selling low.

Come to think of it, why bother with CLF at all? It seems to me that the benefits (e.g., better prices at purchase due to economies of scale — CLF can likely buy at lower fees than I could from my broker’s inventory) are nearly wiped out by interest rate risk over the short term.

Or am I missing something about how CLF operates? Are gains distributed or reinvested? Can you receive funds back from the rung that just matured without triggering a sale from the other 4 rungs?

Thanks,
Chris

Despite the fact that most REITs get treated as ‘other income’, my emphasis was mainly having REITs in a taxable account for enhancing one’s income stream. Stating that they’re ‘better’ in a tax-sheltered account is subjective indeed (maybe not as it relates to the couch potato strategy) and by investing on this premise exclusively, one’s cash flow stream can be compromised. There will be less liquidity for the investor when too much is tied up exclusively in RRSPs. One of the biggest problems people have when they retire is that too much is tied up in registered accounts.

It’s inevitable – the tax man/woman will come, and when it’s time to start drawing on RRSPs, it gets treated as income. Not only that, regardless of one’s income, there will be withholding taxes on withdrawals. If you’re income is low enough, you’ll eventually get refunded, but that’s not too good if you need the cash.

My thoughts are that a good strategy entails an asset allocation that embraces a more balanced approach to both non-registered and registered accounts.

I’m actually in the process of reading up on your Model Portfolios section of your site as I’m interested in possibly adding index funds and ETFs for my own portfolio.

Regarding one’s preferences however, I’m with you. If an investor wants 40% in bonds and that’s what makes them sleep at night, by all means – let it ride. My example of providing banks as an alternative was mainly to highlight the idea how some of the dollars allocated for bonds could go elsewhere. My intent was not to violate the terms of the couch potato strategy, just to add some critical feedback and alternatives as asked.

Nice thread. Looking forward to spending more time on your site. I like what I see.

2. Consider XBB instead of XLB.

3. Consider dumping XRE. Real estate returns are in fact highly correlated with the broader equity market. You still get some exposure to them as well through CDZ.

4. Why the overweight of telecom stocks? I would consider changing this to a basket of dividend paying stocks, across three or four defensive industries in Canada: banks, pipelines, utilities.

5. Why the taxable account? Can you transfer these positions in kind to TFSA?

6. Bond funds are great for diversification but recognize that your principal is not guaranteed. Consider changing XRB and XLB to direct bond ownership. You would want a 5 year ladder, similar to GIC ladder.

7. Personally, I would scrap CGL and plough it into CDZ.

How often do you plan to rebalance? I think once a year should be adequate.
GOod luck!

The TFSAs are maxed out ($10K each per spouse), so they can’t move anything from the taxable account. They could start moving a bit each year as the contribution room grows, however.

The idea that individual bonds offer principal protection, but bond funds do not, is an illusion. Here are couple of good articles that explain this:
http://moneywatch.bnet.com/investing/blog/irrational-investor/bonds-or-bond-funds-an-easy-choice/873/
http://blog.canadianbusiness.com/bonds-versus-bond-etfs/

In any case, building your own ladder is fine for short and maybe intermediate bonds, but it’s much harder to do with long bonds (10+ years to maturity). It’s impossible with real-return bonds because there are not many issues, and some have maturities longer than 20-25 years. XRB is so much easier and at 0.40%, it’s hard to beat.