Have a look at the Claymore 1-5 year bond ladders (CLF and CBO)– one holds Canadian government bonds in a “ladder”, the other Canadian corporate bonds. I hold CLF in my portfolio but not CBO. The yield on CBO is only 1/2 percent higher than CLF– for me personally, not worth the extra risk. I also hold some XSB and AGG (on the US side)– I have roots on both sides of the border so the US currency risk isn’t a huge concern.

In general, for bonds, think short–i.e. less than five year maturity– to avoid undue interest rate risk.

Yet at the same time you are saying you need to actively trade your portfolio.”

Hi Rob– thanks for your question.

No, I’m definitely not actively trading. I went completely into cash in my investment accounts between January and July 2008 having a sense that a major correction was coming (my educational background is political science, my career is in healthcare)– previously they had been held in mutual funds with my professional association. There they did fine, but I was at the point dollar-wise where I wanted to look after my investments myself and to go the index ETF route.

During October, November, and December of 2008, I bought like crazy averaging in over successive days. My last purchase was in February of 2009 except for a bond fund purchase a week ago.

My equity ETFs are divided between Canadian, US, and International funds and REITs. The problem now is that some of my ETFs have done too well since the March 2009 market nadir– my Vanguard Emerging Markets ETF is now up 70% over cost. Selling off some a portion of my stars like this Emerging Market ETF isn’t trading– it’s rebalancing. The sales proceeds then get plowed back into one of my “under-performers” which I am presently underweight in.

As a former political science student, I can’t help but look at the macro side of the political economy. In late 2008/early 2009, equities were a screaming bargain. Now, I don’t think there are any great bargains out there. The equity side of my portfolio had definitely gotten heavy with this past year’s rally– for me it’s looking like a good time to start concentrating on the bond-side of my portfolio.

Cheers!

BC Doc

A well-thought out asset allocation strategy helps because if an asset class becomes bubblish, the asset allocation dictates putting money in trailing asset classes. If that’s not enough, the policy forces us to take some profits from the hot asset class.

@Matt: You may want to check out posts on bonds in the blog archive:

http://www.canadiancapitalist.com/sitemap/

Quickly though, I use short-term bonds (XSB) for the bond component. I don’t hold XRB. When prices are attractive, I intend to hold real-return bonds directly. I don’t buy foreign bond funds because they introduce foreign exchange risk in what is supposed to be a “safe” holding.

The problem with your conclusion is that you’re assuming people can time the markets well. Emotions aside, can you tell me anyone was prepared for the 40% drop all stocks took as a result of the mortgage collapse? Even if you saw it coming (which would make you better than most analysts), when should you have gotten out? A year before, 6 months before, a week before – assuming you knew when it would hit of course.

How about this gold bubble developing? When should you start selling stocks that are tied to gold? It will inevitably crash, the question becomes can you time when? And can you emotionally let go of stocks that are flying hot? Greed will always say hold on just a little longer.

A further thought. If you could find the best managed stocks out there, you wouldn’t be the only one. So, others would be clammering for the stock, driving up the price, resulting in an a premium price that results in an average return…the same return you’d find in an index over the long run.

B&H with consistent contributions is the only way to avoid the stress and the extra analysis.

XBB – Canadian Bond Market Index
XRB – Canadian Real Return Bond Index
XSB – Short Bond Index
BND – Vanguard Total Bond Market

Thanks.

@Basil2: It is much easier to value index levels than it to value stocks. You can easily estimate expected returns from stocks and compare it to bonds. The problem is this method isn’t foolproof. Around 2000, it was clear that stocks were overvalued (Warren Buffett famously wrote a Fortune article explaining why) but it wasn’t so in 2007 or 2008. I’ve written many posts myself that investors should have modest expectations from stocks before the downturn.