I have been checking my portfolio quite a bit lately (although it is getting a bit boring and the performance of my holdings has been predictably bad). The only part of my portfolio that has showed an increase in market value vs. book value were my two bond ETFs (Short-Term Bond Index ETF (XSB) and Real Return Bond Index ETF (XRB)). Makes me glad that 25% of my portfolio is made up of bonds. It helps me get through the night, so to speak. Even better is that it helps preserve capital during these bear markets and provides some holdings that are not so correlated with stocks for increased risk-adjusted return.
3 thoughts on “Why It’s Nice to Own Bonds”
It is pretty much a rule of thumb for me to never hold bonds. The way I look at is that if inflation is taken fully into account they are almost always losers. Of course there is then the question of what is the real rate of inflation. In my opinion the CPI is a fraud and the real rate of inflation is 2 or 3 times that amount. (See http://www.shadowstats.com/) To determine what the real rate should be simply use the appreciation of the average single detached home as a real CPI indicater. Housing is after all the biggest single expense for most people. I think you would find that it multplies more than 10X every 30 years!
I hope you are not serious in thinking that the average price of a single detached home can be used as a real CPI indicator. First of all, the consumer of a home never really cares about the price of a home, all that they see is the monthly payment, so if anything, you’d have to use that in your CPI. Secondly, the average consumer isn’t buying a home. What percentage of all homes are either bought or sold every year? What percentage of consumers are buying or selling their home annually? Most everyone is paying for shelter of some kind, however, so using monthly rent or monthly mortgage payments as part of a CPI seems legitimate and this is a part of the existing CPI, at least in Canada.
John Williams has some interesting ideas. Apparently he has a problem this argument: “The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak.” What’s wrong with this logic? If steak doubled in price, more people would start eating ground beef instead so it would make sense to replace steak with ground beef in the CPI (or weight ground beef more than steak).
Here’s how Canada does it: “One measurement bias in the CPI may occur because the quantities of the various items in the basket are fixed. Consumers can adjust to price changes by buying less of an item whose price has risen and more of a cheaper substitute. Statistics Canada attempts to take into account some of this adjustment by updating the contents of the CPI shopping basket every four years.”
Measuring CPI using the “costs of a fixed basket of goods” (as Williams suggests) and thinking that consumers who purchase that same fixed basket of goods year are year are “maintaining a constant standard of living” is moronic.
I wonder if Williams will raise his $175 subscription fee by 9% next year to cover his rising expenses (John thinks that the CPI is “understated by roughly 7% per year”)
I’d also like to point out to my readers that GI is invested in “99% in RBC precious metals fund and SLV silver ETF and 1% cash”. Kiyosaki would be proud. 😉
“I’d also like to point out to my readers that GI is invested in “99% in RBC precious metals fund and SLV silver ETF and 1% cash”. Kiyosaki would be proud.”
Hah! So you think you have a superior investing strategy?! I will propose a friendly challenge like this;
You make public exactly what you are invested in and any changes you make to your portfolio just as I have so that it is clear to all how your strategy has worked. If your % gains by the end of 2008 are better than mine I will put a link to your blog on my blog. Conversely if mine are better than yours you will put a link on your blog to my blog. I extend the challenge to any and all other financial bloggers out there as well!