Comments on: Ask Dave: Why Bonds Anyways?

By: CK

CK — Fri, 07 Dec 2007 18:13:32 +0000

Ok, I looked at the iShares site and basically looked at the 5yr numbers they gave for the indexes that the funds are based on. It shows 4.32% for the Short Term Bond Index and 8.66% for the Real Return Bond Index. Sometimes its hard to know what data they are actually including to come up with the percentages - sorry if I screwed up a bit on the interpretation of the google finance chart.

By: Dave

Dave — Fri, 07 Dec 2007 08:48:51 +0000

I got my figured from iShares’ site. The one thing those Google charts leave out is the distributions given out at regular intervals. I’m not sure if the numbers on the iShares site take those into account or not.

Also the -7.78% is not over 1 yr, it’s over 2 years (look closely).

Again, compare the XSB performance over the last 5 years to international equities over the last 10 years. You can always pick any random period and find good ones and bad ones. Go longer term.

By: CK

CK — Fri, 07 Dec 2007 07:54:40 +0000

So I was looking on google finance at XRB and XSB.

link: http://finance.google.com/finance?q=TSE:XSB
link: http://finance.google.com/finance?q=TSE:XRB

when you select “Max” I am guessing it is reading out the return over the life of the bond fund.

Looks like XSB is 0.43% (over 5 yrs) and XRB is -7.78% (over 1 yr)

Man, those returns seem pretty brutal!

Dave you were saying “and the return of XSB since inception (7 years ago) is 5.71%” where do you get that data from…or am I just not getting the right data from google? I am lost now. Cash Optimizer account looking better and better

By: Dave

Dave — Thu, 06 Dec 2007 08:10:22 +0000

CK: thanks again for your great question. And part of my answer (the basics of “why bonds?”) was directed more to the general audience….

I would think that bonds “should” beat any savings account.

US Treasury Bills are supposed to the safest investment. You’ll often see authors refer to them as having 0 volatility. Burton Malkiel says “these are the safest financial instruments you can find are widely treated as cash equivalents.” Not sure about Canadian T-Bills. If you look at the current yields of 30-day Canadian T-Bills they are just higher (3.88%) than ING’s rate of 3.75% on savings accounts. I guess they are all just cash equivalents really, and basically all have negligible risk, whereas bonds have some non-negligible risk, hence the higher return.

By: CK

CK — Thu, 06 Dec 2007 04:53:19 +0000

Thanks for the replies on this. I guess I wasn’t 100% clear in my long winded question. I understand that I should have bonds in my portfolio, but I guess I did not know that generally bonds “should” beat any savings account interest rate. Hopefully my Cash in E*Trade is backed by CDIC - but Ill post back when I find out - I plan to call them soon anyways. Thanks for the info on XSB and XBB, still have to read more on XRB and see why this would make sense to purchase as well.
Thanks for the input guys.

By: Dave

Dave — Thu, 06 Dec 2007 03:50:49 +0000

FourPillars: I was already convinced of the advantages of low-cost investing before reading A Random Walk Down Wall Street and I still enjoyed it so I’m sure I’ll enjoy Bernstein’s book as well.

By: FourPillars

FourPillars — Thu, 06 Dec 2007 02:36:55 +0000

I’m surprised that you haven’t.

I would definitely recommend it although it won’t change your way of thinking since you already are enlisted in the passive investment cult!

Mike

By: Dave

Dave — Wed, 05 Dec 2007 17:03:27 +0000

FourPillars, I think I should read Bernstein’s book. The table of contents looks good.

By: Dave

Dave — Wed, 05 Dec 2007 16:58:44 +0000

David: did I say that? If I implied anything I might have implied “safer” rather than “safe.” In my first paragraph I gave a stock market crash example. Just because I didn’t give a hyperinflation example doesn’t mean I think bonds are safe. I later mentioned inflation as a risk to bonds, and I implied a lot that bonds are lower risk that stocks, which in general is true. If you mean that people in general have an assumption that bonds are somehow safe, investments, I would agree that a lot of people probably think so.

By: FourPillars

FourPillars — Wed, 05 Dec 2007 16:43:53 +0000

Good answer. I’m an XSB fan as well - Bernstein says the same thing that long term bonds are not worth their risk and to buy short term bonds.

One other point - the 4.15% in the Etrade account is not guaranteed. They can change that rate anytime.

Mike