A reader recently sent in this question on asset allocation:
I’m an investing newbie. Last year, I started investing in all four TD e-Series Mutual Funds in my TFSA on my own after reading your posts. I currently have a 30 percent allocation to bonds. Should I keep investing in TD Canadian Bond Index (e-Series) with interest rates forecasted to go up? Or should I cut down on the bond fund and allocate more into the other stock index funds?
Bonds have been terrific investments for a long time now. As of Sept. 30, 2013, Canadian bonds (as measured by the DEX Universe Bond Index) have returned 5.63 percent over 5 years and 5.22 percent over 10 years. Canadian stocks (as measured by the S&P/TSX 60 Index), on the other hand, had returned 3.72 percent and 8.45 percent respectively during the same time periods albeit at a much higher volatility including a significant stock market crash. Therefore, the natural inclination of many investors would have been to look at the recent past and concluded that they are better off in bonds than in stocks. Asking whether one should avoid an asset class after it has experienced a huge run up if therefore an insightful one.