Since June, 2010, I’ve been selling off large chunks of my bond portfolio. And today, my bond allocation is lower than it’s been in years.
With a U.S. federal 10 year treasury note paying just 2.38%, bonds are very unattractive. And my Canadian bond index isn’t paying a heck of a lot more.
The earnings yield on the S&P 500 is double the bond yield—so I don’t think it makes a lot of sense to put money into bonds right now.
Selling off more than $120,000 in bonds, (in June) I bought decent sized positions in:
- Coca Cola at $50 per share
- Johnson & Johnson at $57 per share
- XDV.TO (a Canadian high dividend yielding index) at $18.50 per share
- TJX Companies at $40 per share
- Microsoft at roughly $24 per share.
Currently, my bond allocation is about 30% of my total portfolio.
Considering that I don’t like to speculate, and I don’t have a pension, I’ll never be an “all or nothing” kind of investor who moves fully out of the stock market or out of the bond market. I’ll leave that for the Vegas types. For me, having a 30% bond allocation is like parachuting—likely safe, but still frightening as hell.
How about you? What are your thoughts on bonds? And have you trimmed your bonds based on the relatively low yields?
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14 comments
The Biz of Life says:
October 11, 2010 at 7:45 pm (UTC 8 )
I think Warren Buffett would agree with you based on the comments he made when visiting China. US and Canadian bonds are very unattractive at the moment. Aussie bonds and money markets aren’t too bad. The earnings yield of stocks makes them a better investment over bonds. Sooner or later interests are going up and bond investors are going to burned.
Andrew Hallam says:
October 11, 2010 at 9:31 pm (UTC 8 )
@The Biz of Life
Hey Biz,
It’s interesting that you’re watching Aussie bonds. I haven’t seen their prices or yields, but I was talking to an Aussie yesterday who said that he had money in a high interest savings account paying about 5% annually. Perhaps it was a money market fund, but either way, that’s a high interest yield.
What about you? Do you own bonds, and if so, have you trimmed them at all Biz?
Myke@In Search of Salt says:
October 11, 2010 at 11:22 pm (UTC 8 )
Hi Andrew,
Glad to see you made it home from China safe and sound. I was a little worried that the Sino-Gestapo would track you down for the post you made from there. Again… only half joking.
My bonds have been perplexing me lately… I hold my bonds for the long term, so had no plans on trimming them. BUT, even though interest rates in Canada have risen a good amount over the past 6 months (I only have Canadian bonds) my bond portfolio has risen 20% over the same time frame.
This goes against everything I understand about bonds, so I am recently thinking about taking my profits, and buying again when prices move down.
When the BOC announced their first interest rate hike (from 0.25% to 0.5%) , I expected my bonds to go down… but they went up… and up. Very confusing.
Something to note about my bond portfolio: Currently, I only hold long-term corporate strip bonds, and they are held within my RRSP. ie. I don’t care about yield, and don’t have to deal with taxes… yet
I am still deciding if I should sell or not. On one hand, my initial plan was to hold them until maturity, so daily prices shouldn’t influence my choices. On the other hand, I have to question if investor sentiment isn’t too foolish, and I should take some gains now. I also wonder if the Boomers have maybe had enough of the stocks market, and have made a permanent switch to bonds.
I have no answer yet, but your post is timely. I appreciate it.
The Biz of Life says:
October 12, 2010 at 8:26 am (UTC 8 )
I’ve been looking at some Aussie currency funds, which are essentially Aussie money market accounts. Haven’t pulled the trigger yet, but they look enticing to me. I own no US or Canadian government bonds because their yields are dreadful and the likelihood of capital loss is high when rates go up. Right now I have a 25% allocation in short-term corporate bonds and emerging market bonds, lower than my normal 40% allocation.
DIY Investor says:
October 12, 2010 at 8:46 am (UTC 8 )
I haven’t cut back on bonds but have moved down the yield curve so that total bond (AGG) is about half of my bond position. I have a bigger position in short-term corporates (CSJ) and in high yield as a cushion. I have increased exposure a bit in an ETF of Trust Preferreds (PFF) but am trying to be cautious. When rates move higher they will get hurt a bit.
I should probably dabble in emerging market bonds a bit like Biz of Life and do have some inflation protected holdings in some client accounts.
It looks to me like stocks and bonds are seeing the world differently. Stocks are saying that the recovery is taking hold and bonds are saying that we are going off the cliff.
Of course bonds are pricing in QE2 and may be disappointed. Many times when the event happens prices move opposite of expected because the event is priced in. This may happen even if the Fed announces QE2 at the next FOMC.
Ah…never a dull day.
Andrew Hallam says:
October 12, 2010 at 5:32 pm (UTC 8 )
@The Biz of Life
Hey Biz,
Based on the price of the Aussie dollar right now (near record highs, I believe) do you think there’s a great currency risk?
Andrew Hallam says:
October 12, 2010 at 5:34 pm (UTC 8 )
@DIY Investor
Hey Robert,
Never a dull day indeed! Let me know if you and your wife can come to SE Asia for a visit. Of course, I’d do my utmost to rope you into talking to our staff, ala Google-style. And you could stay with us. You won’t be able to bring the motor home, but accomodation with us would be free.
Mich @BTI says:
October 12, 2010 at 7:03 pm (UTC 8 )
HI Andrew,
My RRSP account has a similar composition as yours regarding bonds. I’ve kept the allocation at 30% so far and intend to keep it for the long term. This is retirement money, no playing around! 70% diversified Canadian equity funds and 30% Canadian bonds.
Andrew Hallam says:
October 12, 2010 at 8:19 pm (UTC 8 )
@Mich @BTI
Hey Mitch,
That sounds pretty responsible. And if the markets ever get pounded we could find ourselves with 50% bonds–and the wonderful prospect of rebalancing, and buying “on the cheap” to get us back to 30% bonds. Join me in a prayer for a stock market hammering!
larry macdonald says:
October 13, 2010 at 10:15 pm (UTC 8 )
Good idea to keep part of portfolio in bonds and maintain some diversification in the event economies remain deflationary and bond yields decline even more, a la Japan.
Kevin@InvestItWisely says:
October 13, 2010 at 11:50 pm (UTC 8 )
I’ll be the outlier here with my 1% of bonds. I currently have no interest in purchasing any, either. I don’t mind at all if the stock market stays stagnant for the next 10 years or so; I’ll keep buying at lower prices if I can. At that point it will be nice if it starts going up.
Andrew Hallam says:
October 15, 2010 at 7:49 am (UTC 8 )
@Kevin@InvestItWisely
Hey Kevin,
Even if you did want some bonds, I don’t think now would be a great time to go after them.
Peter Steinebach says:
October 26, 2010 at 11:01 pm (UTC 8 )
Darüber würde ich wirklich gerne noch viel mehr erfahren!
Andrew Hallam says:
October 27, 2010 at 7:39 pm (UTC 8 )
Peter,
Sie können die Fragen stellen und ich werde mein Bestes tun, um sie zu beantworten