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Saltin posted:Yeah, look, I wasn't writing specifically about the manulife one account, but I agree with you there. What I'm saying is that the premise of the "house as investment" is fundamentally flawed, in my estimation. We don't have to agree about that. Also, while I agree that US and Canada are different with regard to mortgage recourse, they are not different in regard to being affected by economic forces. This is not the place to discuss Canadian real-estate and whether a correction is imminent , but that's why I said what I said. I just want to quote necro this guy because up to this point in the thread there had been some comments re: RRSP and TFSA accounts that I disagree with pretty strongly. There's literally no reason to ever get an RRSP or TFSA account with a retail bank branch when the SDRSP options are available at the (bank-owned or even independent) brokers. The actively managed funds that the retail branches try to funnel you into are there because they're PROFITABLE, not because they're GOOD. Broker accounts have access to all of the mutual funds of a given bank, often the funds of other banks, as well as ETFs / direct stocks / bonds / whatever. As Saltin noted, the iShares series is objectively better than pretty much any sort of mutual fund out there. I have something like 70% of my retirement savings in the XIU. You can even set up the same sort of automated transfers. There's also some math on the RRSP / TFSA trade-off (rather than just broad "if you have a high marginal rate" comments) which you can use to make a decision about what to put where. I haven't seen anyone reference it so far but I'll finish the thread before I post it. I'll see if I can find an online source, otherwise I'll whip up a googledocs spreadsheet.
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Jan 23, 2014 18:18
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Eh, earlier in the thread I got the feel that people were suggesting retail branch RRSP accounts (the kind that can take MF only), which are just really bad. (e: or worse, the kind that are tied to a cash savings account with a lovely interest rate). It seems in the later pages the thread has turned a bit. That shows me for posting before finishing the whole thing. The e-series funds are fine, but I guess I don't know why you wouldn't go direct to ETFs like iShares. Let's say you only have enough to save $2000 per year. This is enough (approx) to allow you to buy a board lot (100 units) of the XIU, at a cost of  plus the 0.18% MER. Over a 10-year horizon, the transaction fee is vanishingly small, only 0.05%, for a total of 0.23 in annual cost%. This is compared to the best mutual funds which are significantly more than that. Since you're never ever going to trade these things (buy it, forget about it), it doesn't matter that you'd get dinged for doing so.On the RRSP vs. TFSA question, if you can only pick one, then pick one, is the simple answer, and save on fees paying for both. They're actually essentially indifferent in a flat marginal rate environment for a given level of return. In spite of views regarding funding of the CPP, you can't really assume that the marginal rate will change due to exogenous factors when making an investing decision. If anything, I'd be biased to it decreasing as has been happening to corporate rates. There's good research that this actually increases tax receipts for a government over time. Disregarding this, you can make the reasonable assumption that your personal marginal rates will be lower, unless you are way into the top bracket. It's a very small subset of people that save sufficiently to actually have similar income in retirement. This makes the RRSP objectively better for the vast majority of tax payers, i think. Your situation of being self-employed and having a lot of savings kept elsewhere is a relatively uncommon one, I think. The calculations I was going to show refer more to an allocation across the RRSP and TFSA where you have enough funds to use, but not max out, both. The surprising result is that even if you are careful (lucky) enough to get all your higher-returning investments into your TFSA, you will still likely be better off having them in the RRSP rather than the TFSA due to the marginal rate savings, unless there's a fairly significant difference over a long horizon. Final point on choosing between the two - the RRSP has the benefit of stealth savings. Personally, when I put money into my RRSP, I treat it no differently than any other after-tax use of funds, but instead of taking a trip with my tax return, I force myself to invest that also, which means I end up not only making at least as good returns on the initial investment, but having more funds invested overall. Hopefully no-one is budgeting on using a tax return to make day to day payments, so this should be relatively easy to do for most people. Said a different way, I save during the year assuming I won't get a refund. If I do get one, I invest it, as I already budgeted for not having it. The RRSP facilitates this because any non-payroll contributions will result in a refund, while the TFSA does not. Kalenn Istarion fucked around with this message at 19:36 on Jan 23, 2014 |
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Jan 23, 2014 19:28
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Lexicon posted:The Canadian index e-series, comparable to XIU, has a MER of 0.33%. I realize that 0.33% > 0.18%. But it's pretty drat close. And it carries with it the following advantages: Close, it's almost twice as expensive! Hyperbole aside, yours is a reasonable position if your intention is to use it as a gateway to get people to move up to the big-boy tools. On the cost-averaging point, it's a question of scale. If you're investing $2000 a year, but doing so over a 30-year career, investing once a year at the start of the year is going to average you in just fine. On the trading platform discussion, I've used both BMO and TD's discount trading platforms and I'm hard pressed to see a material difference between the two. They're pretty equivalent functionally and have similar pricing. I believe BMO has moved to a flat-rate pricing structure for all levels of investment dollars though (similar to RBCDI). Have heard the RBCDI platform has gotten better in recent years but is still not comparable to TD and BMO. CIBC and Scotia are generally thought to be worse in all respects but I haven't seen or used them myself. There was also a question from a few people earlier in the thread about moving money around. I personally use email money transfers. Most accounts will now include at least a few free ones a month and many institutions recently increased the per-transfer cap. I know I just sent $3,000 the other day with no issues. If you need to move money quickly, the only way to do it faster is to physically walk between two branches as the email transfers now arrive in less than an hour and you can deposit it immediately in the transferee account.
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Jan 23, 2014 20:53
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Kale is clearly the best. Ultimately it comes down to what works for you - I prefer to be a bit more active, and so opt to make relatively chunky, manual investments. This may have something to do with the way I'm compensated by my employer, which is chunkier than most. If the auto-transfer works better with your income flow then at the margin it's better to get the money in than not, so I agree on that point. We're both clearly advocating that the paleo diet is bad and will give you a heart attack.
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Jan 23, 2014 21:17
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Corrupt Cypher posted:
Don't take this personally, but this comment shows just how little you understand about how shorting works and I would highly recommend against doing so until you learn more about it. To address some specific points: By shorting anything at all, you are by definition using margin - you have to borrow the stock (margin) that you are selling, and then need to also capitalize it so your broker doesn't lose money if the stock moves 50% (or whatever coverage they require) in a day. The next problem is that you can't "make sure your broker sells before you start owing them money". Even if you have a very active IA, there's not much they can do if the market moves away from them. If you want to set your own stop loss you can do so, but there's no guarantee it will execute at the stop price you set, and you could be forced to trade well into the red or not have a trade execute at all. Third, if you get to a position where your broker is owed money, the margin clerks will step in and just buy stock on your behalf (to offset the short) at whatever price they can get in an attempt to mitigate their own risk. They don't give a flying gently caress whether you are losing money, and will just act, leaving you to make up the difference. In a later post you reference how you would put $1000 in a brokerage account and then sell that amount of stock... this isn't really how it works. Usually, when you short a stock, the broker will require you to put up 150% of the shorted value as cash collateral. This means that if you want to short $1000 of whatever, you need to have $1500 in your account. $1000 of that will come from the stock you just shorted, so you need to top up with $500 of your own other funds. That money is then not earning profit elsewhere. Second, you have to pay interest on the $1000 of stock you have borrowed. This is a non-insignificant cost, and further increases your return hurdle. Third, if your stock goes the wrong way, almost every broker will require you to add additional cash to top up your margin should your "coverage" get below 110 - 125% of the short value. So in the $1000 example, if the stock goes up by 25%, you will then require $1875 in the account versus having only $1500 and will need to top up with the difference of $375 (This is 75% of your original investment for only a 25% move the wrong way!). If you don't rectify the margin call, your stock will be sold in spite of any view you might have that it will recover and you will lose money. In my 25% move example, you will have suffered a 50% loss for a 25% move against you. A further point that hasn't been touched on, is that any broker will reserve itself the right to cover your short at any time it wants and for any reason. This means that you can be turfed out of your position at any time, with no warning. Usually they won't do so arbitrarily, but reasons that can trigger this include the owner of the loaned shares selling them, failure to cover your margin, and the weather being a bit lovely when the margin clerk walked in to work this morning. Ultimately, you can do whatever you want, but you're taking a lot of risk for potentially very little gain. I'm paraphrasing, but one of the best axioms for speculative trading continues to be "the market can stay irrational for much longer than you can stay solvent". If nothing else, I'd advise you do a lot more reading about how this works before making the trade. You also need to understand exactly what your brokerage's margin limits, loan rates, and general margin call policies are. Some are more aggressive than others in calling in margin and trading out of your stock, but all have the right to do so whenever the heck they want with NO warning. Buying put options is an alternative strategy to consider if you have a strong bearish bias, but it comes with a wholly different set of risks and you also need to know what you're doing to trade options.
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Jan 24, 2014 19:56
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tuyop posted:This an awesome post and I learned a lot from it. Thanks! I had started to write out a long effortpost but there are lots of resources on the internet which explain the basics of bonds in a useful way and this prevents me from dumping a giant wall-o-text. It might be more useful if those who are interested instead do some reading and then come back with questions here, as I can be more specific in answering questions than a general post. To get you started, here's a link on investopedia: http://www.investopedia.com/terms/b/bond.asp That page has a few links at the bottom which expand on the basic definition (5 Basic things to know about bonds and bond basics). The short version is that bonds are a contractual agreement (called a bond indenture) of a company to pay coupon payments and a principal payment at some point in the future. The price you pay to buy the right to that obligation depends on the term, interest rate, and underlying credit risk of the issuing entity. Longer term, higher risk and interest rate higher than the current prevailing rate for similar bonds means a higher price for the bond while the reverse means a lower price. To actually price bonds you need to use discounted cash flow analysis which needs to be tweaked specifically for each bond and its features. Certain bonds also contain features which act like embedded options and can increase or decrease the value. The really short version is that unless you're fairly well informed on it and have a fairly large pool of capital, you're much better off buying a well-diversified bond ETF (or MF if ETFs are unavailable to you) than buying bonds directly yourself. To answer your question about maturity is a complicated one. Many people own bonds with 5-10 year maturities because these are the most common bonds available but ideally you want to own a diversified portfolio of maturities, industries, geographies, and credit risks. Buying a single bond series is not much better than stock-picking.
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Jan 24, 2014 23:30
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Saltin posted:Why not just buy an Indexed Inverse ETF like HXD if you are bearish? It's not complicated. This is certainly more straightforward but the underlying fund will have essentially the same structure (or use derivatives to approximate it) as the standard short structure I noted above. The advantage of a fund is that you don't have unlimited downside (can only go to zero) and you don't need to worry about the complexities of margin calls. They're also diversified so you reduce the risk of a one-off shock wiping you out. The disadvantage is that you are paying the managers to worry about it and also paying whoever is funding / backstopping the fund to take on the risk that it goes upside-down.
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Jan 24, 2014 23:41
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Saltin wrote most of the key points of my effortpost in a much more succinct way than I had in mind. You would buy a bond if it was relatively "cheap", or implying a higher YTM (yield to maturity) than comparable securities, and sell it if it was implying a lower YTM. The YTM is sort of the inverse of the bond price calculation. Bond price = PV (principal) + PV (coupon1) + PV (coupon2) + ... + PV (couponX) where X = the remaining maturity of the bond times 2 and using the prevailing interest rate as the discount rate. - You can use the XNPV function in excel / googledocs to approximate bond prices, although it's not 100% right as bonds can have funky interest periods like being calculated on a 360 day year  YTM = IRR (-Bond Purchase Price + Bond Coupon Payments + Bond Principal) - You can use the XIRR function in excel to approximate the YTM of bonds (similar issues as bond price calc)  e: why did my images not spoiler properly? I haven't tried to post something like that before...
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Jan 25, 2014 00:39
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Going to comment in-line in tuyop posted:I'm going to do some reading this weekend on these, because it's pretty interesting, but the biggest thing I'm wondering is this:
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Jan 25, 2014 00:51
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Lexicon posted:Does anyone here use the BMO World Elite Mastercard? I'm typically philosophically opposed to annual credit card fees, but the benefits for this seem actually well worth the $150 (after 2nd year) annual cost (rental car coverage, extended travel insurance, 2% of purchases for travel, airport lounge access). I have one of these, it's unequivocally great, as long as you expect to spend >$7,500 per year on the card. We basically put everything on cards and then just pay it off every month so this is easy for our spending patterns. You do need to use their custom travel booking website (unless it's changed recently), but the service is subcontracted to Carlson Wagonlit who does all sorts of corporate / reward travel booking. They have access to the same prices and flights that anyone else does, and has a system for travel packages as well as individually booking flights and hotels, etc. I also have a TD First Class Travel Visa Infinite. On that one you get 1.5% on all purchases in points, and 4.5% on any travel purchases. The points are redeemable on expediafortd.com (so basically expedia), which again gets pretty much the same pricing as any other major online booking site. I like both because once in a while you get a little better pricing on one or the other, and the BMO service is actually better at getting the flight ticket level you want (assuming you ever want something other than the absolute cheapest economy fare). For example, we just booked a trip to Hawaii. I used the BMO points that I had banked for about half off the flight as we wanted Tango Plus fares for the status, and used my TD points on the hotel. 3 days later, I already had 4.5% of my hotel booking back in points, so used those to book a dirt cheap flight to a goonp in the US next month. I tend to use the TD card a bit more, but they're both good programs. e: both cards also have things like extended warranty and product loss insurance, as well as collision damage coverage on rentals. For example, I had a $400 camera replaced 5 days after I bought it when I dropped it in a lake. A different time, some shithead knocked the mirror off a rental car in a parking lot. I wasn't there, so didn't have anyone to make a claim against, but I just called Visa and they spoke to the rental company and it just went away - never even saw a damage bill. Kalenn Istarion fucked around with this message at 19:40 on Jan 29, 2014 |
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Jan 29, 2014 19:36
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Lexicon posted:Thanks - I think I might switch over to this then. The free first year definitely helps as an incentive to try it out, and I will comfortably hit that spending limit as I also charge everything monthly and then pay it off. I used to be able to put my business expenses on my personal card as well - the points I accrued were hilarious. I travel a lot for work so was getting 7.5% of every business trip back as travel funds (the TD card used to have an even better rate on travel). I ended up going to Turks, St. Lucia, and Barbados mostly on points over a few years. Since it sounds like you're self-employed, you might still be able to get away with that. Sadly, my current employer now requires using a corporate card.
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Jan 29, 2014 20:25
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Lexicon posted:I totally could get away with this for my business expenses - I currently have a separate card for those. It's a bit of a pain to co-mingle business and personal expenses though - it's unfortunate you can't have separate 'ledgers' within a single credit card account. Arguably you could just get a second (points) card for your business stuff, but the other option is to just keep receipts for your business stuff. I just had a folder next to my desk at home where I'd drop stuff at the end of the day and then take them into the office to file for cash reimbursement monthly or so. I made a short note on what each one was for. Not sure how picky Rev Canada is but see no reason that wouldn't be sufficient evidence for them as well.
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Jan 29, 2014 20:50
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whatupdet posted:Are there any cards where you can use points to cover fuel/taxes surcharges? I have Air Miles (BMO MC & AMEX) and it seems it's best suited for Canada/US travel as the charges are usually in the $150-230 range, whereas going overseas (to Europe for example) you're looking at $450-700 and sometimes I can get a return flight for under $1k so you're not saving much but using a ton of Air Miles. The TD First Class and BMO World Elite cards we discussed above both can pay surcharges with points. Think of your points as effectively cash that you can only apply to travel.
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Jan 30, 2014 19:35
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Lexicon posted:Can someone account for the difference in these two charts of CPD (iShare Preferred Share Index): Yes, you answered your own question. The top chart shows total return, which includes dividends, while the bottom shows only unit price movement, so the bottom tells you what your $1 invested is worth today (in terms of remaining money in the fund), while the top line tells you what that $1 is worth including all the dividends you received - note that these charts usually assume reinvestment of dividends in the originating fund. Also, presumably you ran these both in USD, as currency difference would impact the result as well but the currency reference wasn't immediately obvious in both charts.
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Feb 5, 2014 18:49
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Wasn't clear, if it's a Canadian index then the currency thing is a non-issue. I didn't look at the description so wasn't sure if it was a US pref index, in which case the share price might be quoted in US$ while the total return was shown converted back to C$, depending on how you had it set up - was just another possible source of error. All good.
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Feb 5, 2014 19:42
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Rime posted:So in order to defer some hefty taxes due to a capital gains, today I went and opened a self-directed RRSP account so that I could put some money into TD E-series. Since I was there, I figured I should stop dithering and opened a self-directed TFSA at the same time so I can do some CCP work as well as play with a couple smaller stock trades. Was this a wise plan for someone 24 and making under $40k/yr? If you have the disposable income, there's never a bad time to put money away. e: that said, if you expect your tax rate to be significantly higher in the very near future (say next year due to the cap gains you mentioned), you might be better off saving the RRSP contributions until then. It's a pretty marginal case however.
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Feb 6, 2014 23:02
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Rime posted:
In your case the benefits of an RRSP contribution are minimized by your relatively low current tax bracket, so it's not really as attractive.
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Feb 6, 2014 23:52
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I see no reason to put funds that you need in a year in a TFSA. Just dump it in a high interest savings account. You should think of the TFSA in the same bucket as an RRSP - somewhere to put your long-term retirement investments. Your choice between the two registered accounts should depend on your expectation of current and future tax rates as we've talked about previously.
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Feb 11, 2014 02:42
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Old Fart posted:I didn't file taxes last year. 2013 is my first working year in Canada. (Well, okay, I filed, but I had no Canadian income; I moved near the end of the year.) You won't have a contribution limit for 2013 tax year then. It's always based on prior year income. You'll need to wait until 2014 tax year to claim anything you contribute now. If you want to guess how much you can contribute for 2014 it's 18% of 2013 income up to a maximum of about $23,000 (specific limit on CRA website) LESS any pension contributions for the year (pension adjustment). If you contributed to a defined benefit plan this amount could be very different from the actual contributions you / your employer made as it's actuarially determined.
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Feb 11, 2014 03:56
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Kal Torak posted:You can still set up a spousal RRSP. Anything she contributes will be subtracted from her contribution room and she will get the deduction. It doesn't have any effect on your RRSP contribution room even if it is zero. You will be the annuitant and the income will be taxed in your name upon withdrawal, provided you wait the 3 year vesting period. This. It was originally put in place as a method of income sharing - if one partner makes significantly less and has less retirement savings in their name, it allows you to push more income into the lower retirement tax bracket. That said, I thought there were some changes made that make this easier to do later on (which would obviate the need to do this), but not 100% sure if it was implemented or how it works.
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Feb 11, 2014 06:01
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Kal Torak posted:I have no clue what changes you are talking about, unless you are thinking about Harper's plan to eventually introduce income splitting among spouses allowing them to transfer up to $50,000 in income to their spouse. I'd like to see this happen as it makes no sense that a couple making 50K each will pay less in tax than a couple where one person makes 100K and the other zero. Though I suppose I am biased because the latter situation applies to me more than the former. This exactly. It was introduced in a budget or something but I can't remember whether it was made law or not because it happened around an election.
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Feb 11, 2014 08:39
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Lexicon posted:They will be saving these big ticket items for the election year budget next year, I imagine. As long as it's implemented sometime in the next 30 or so years...
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Feb 12, 2014 20:39
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Lexicon posted:I was actually persuaded by the Ottawa Citizen article that it's a bad idea: http://www.ottawacitizen.com/touch/story.html?id=9499237 That article doesn't really convince me. Yes, it benefits asymmetric high-income families more, but there aren't many tax changes that don't benefit higher-income people more unless they're structured like OAS and phase out with higher income. Speaking of OAS, if you're declaring income on your lower-income spouse's return, they could recapture some of the loss by having that transfer impact OAS clawback calculation, but then they would have to deal with the fallout of being seen to attack old people (it's not one, but that would be the headline). The point about favouring one type of family over another is also stupid, because the current tax structure favours one type of family (symmetric income) over another. In the US there's a family filing option which has clear savings over filing individually in many cases and it's been there for years. The more pertinent social argument is that having a parent home with the kids is beneficial for them, and this makes that significantly more affordable for every family, tax bracket be damned. The at-home partner would need to make the tax savings + childcare and employment costs + some margin before it makes sense, where right now it's just childcare and employment costs.
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Feb 12, 2014 22:22
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Lexicon posted:A great piece on the TFSA vs RRSP decision: http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/02/the-basic-arithmetic-of-rrsps-and-tfsas.html Yep, that's about the long and short of it and the inclusion of the impact of OAS / GIS for low-income participants is additional information to what we've discussed. This makes the TFSA significantly more attractive for people in lower tax brackets.
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Feb 13, 2014 22:30
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If you're a student, you're going to have tuition deductions that will eliminate a large part of your $22,000 in taxable income. I'm with Lexicon - save the RRSP room for when you've got a proper job. Don't put in a TFSA either if you think you'll need the money. Just get a high interest savings account. To do the numbers, let's say you might pay ~$1,000 or so in tax on your severance. If you instead borrowed that amount (to have the same available funds without using your RRSP room), you'd get a loan for $1,000 at interest of something like 5% or less - student loan rates are usually pretty good. So that's $50 a year in interest. Let's say 5 years from now, you are in a 30% tax bracket instead of 20%. So you now use your $5,000 in contribution room, which gives you a tax return of $1500. In the meantime, you've paid $250 in interest on your loan. I'm on a phone so can't so the time value calc easily, but simplistically, you're $250 further ahead by waiting (1500-50x5 interest-1000 loan repayment). With time value it's a bit less beneficial but the conclusion should be the same. Kalenn Istarion fucked around with this message at 10:23 on Feb 16, 2014 |
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Feb 16, 2014 10:21
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Golluk posted:That part I understand. It's how you then convert money in the account to shares in an index fund. Though I expect it's a fairly straight forward process if buying the TD e-series via thier easy web site. Best is to make a TFSA account at Waterhouse. They should transfer the funds for free and you can then buy mutual funds or etfs, or even buy other securities directly if you so choose.
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Feb 28, 2014 22:29
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Correcting some math: Total contribution limit assuming you were at age of majority when TFSA's were introduced: $31,000 Balance start of 2014 (and any contributions prior to date of withdrawal): $13,000 Assuming your balance was entirely composed of contributions, your available contribution limit at the start of 2014: $31,000 - $13,000 = $18,000 Withdrawal: $2,000 Withdrawal doesn't impact your contribution limit in the year of withdrawal, so your available contributions remaining in 2014 are $18,000, not $16,000 or $29,000. However, what you really need to do to find out your available 2014 contribution room is call CRA or access My Taxes on their website and get your actual available 2014 contribution limit. This will take into account the Portion of the $13,000 that was contributions in years prior to 2014 vs earnings (or losses) to make sure you aren't over- or under-contributing. For example, let's say you had actually contributed $12,000 in prior years on which you had made $1,000 in profits. Your available room would then be $19,000 not $18,000, so you would be under-contributing. Conversely, if you had contributed $14,000 but lost some money and were left with $13,000, your actual contribution room available in 2014 would be $17,000, not $18,000 and you would need to pay penalty tax. Short version: don't guess, call the CRA to confirm your limits or use My Taxes.
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Mar 4, 2014 18:41
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FrozenVent posted:To phrase it simply; excluding returns on previous contributions, I can't end the year with more than 29k of TFSA if I understand correctly. Correct, assuming you make no further withdrawals. This equals 13,000 - 2,000 + 18,000 (orig balance - withdrawals + 2014 contribution allowance)
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Mar 5, 2014 08:04
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Yep, long horizon stuff for your kids that they don't need is a good place to go out the risk curve a little. Lexicon's suggestion is pretty much right on what I was going to say. 15 years from now when they're close to drawing it is when you could think about de-risking. That said, have you done an RESP yet? Someone posted a few pages back about why you should really use one. Within the RESP you would sill ideally follow the strategy Lexicon mentioned.
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Mar 17, 2014 16:45
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Golluk posted:I still don't fully understand the mechanics of it, but Is there an equivalent to the Norbit's gambit they could use to That might be possible canada -> US and vice versa but the situation described above wouldn't really have that option. If nothing else because there aren't a lot of stocks you could buy local currency and then transfer elsewhere. With no idea what the current banking situation is like there, have they tried walking into a bank and asking if they can just straight up wire it somewhere and/or convert it to say USD or Euros first? If a wartime restriction isn't in place, the bank would probably be more than happy to help them. E: dunno if HSBC is over there but a core part of their sales pitch is 'true global banking' so they might have some ideas. Kalenn Istarion fucked around with this message at 05:08 on Mar 18, 2014 |
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Mar 18, 2014 05:04
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Dunno about vanguard, but random thought on your allocation - I'd personally go with a lower allocation to bonds at the moment as an eventual increase in interest rates is going to murder bond pricing. I'm personally mostly in equity right now. Timing is for suckers etc etc but there's literally nowhere bond pricing can go from here but down.
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Mar 26, 2014 07:31
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Lexicon posted:Bonds admittedly confuse me, but I believe it doesn't matter so long as a bond (fund) is held for its longest duration and in a tax-sheltered account. I can't get the link to open but here's what I expect it to be getting at. If you buy a bond and hold it through maturity, you will get the return or yield to maturity that the bond priced in when you bought it. So, if corporate 5-year BBB bonds are today pricing in a 5% YTM, you will get that 5% YTM buy buying the bond at whatever price today, clipping coupons, and getting principal repayment at maturity. What this doesn't address is that as interest rates rise and fall, the bond price will move. Rising rates mean declining bond prices. Thus, if you are expecting a market correction in interest rates in a horizon shorter than your investment horizon, you can optimize returns by rebalancing away from bonds and then buying them back once rates have adjusted. Consider this example (numbers are made up and not priced right but are broadly indicative of what would happen): You own a bond with a 5-year remaining maturity, 5% coupon, 5% prevailing rates for comparable bonds = $1,000 price for the bond One year from now, prevailing interest rates are expected to rise to 10%. This means the bond would be re-priced to the present value of the remaining (4 years of) coupon payments plus final principal payment. Something less than $1,000. You can use a web bond pricing calc to get the number. If you sell your bonds today, get $1,000 and invest it conservatively in a GIC at 2% and reinvest in bonds when they're trading at 10% yields you will end up ahead. Your total return is then the weighted average of the returns over the 5 years. 5% per year in the hold scenario vs about an 8% return if you time it. Normally timing is dumb for regular investors but as I said, there's literally no other direction rates can go currently and it's just a matter of time until they correct. This depends somewhat on whether you subscribe to the theory that the housing bubble exists or not, and whether it will have a soft landing or not. A bad burst could stick rates in the basement for a long time, but could also increase default rates so is tougher to predict whether you'd be better to hold or sell now in that outcome.
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Mar 26, 2014 17:22
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Lexicon posted:This is helpful. I think I'll try and build an actual numerical example to convince myself further of the logic. To be clear, I'm not advocating to get out of bonds entirely, just that 40% seems excessive given where rates are right now. I currently have something like 10% relative to my long-term allocation of 20.
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Mar 26, 2014 17:43
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Mantle posted:Can someone explain the relationship between interest rates and bonds? Shouldn't bonds be worth more of they return more interest? Warning, wall'o'text incoming. There's a couple concepts that you're mixing up here on bonds. Bonds will price in the public markets at a level which provides a buyer of that bond a return comparable to current market rates of return. Thus, you are correct in saying that a bond with a higher interest rate would be worth more than a bond with a lower one, all else being equal (you need to assume the underlying companies have similar risk and industry profiles, among other things). However, both bonds would increase in price if the prevailing rates were to decrease. This is because investors will now pay more for the higher coupon bonds; to the point where their yield to a buyer again approaches prevailing interest rates. I'm on a phone and it's 3am so can't do a numerical example at the moment but I will do one in my AM if someone else hasn't beat me to it. Put a different way, if I told you i knew of someone who could lend you money at 8% and I had an investment that would pay you interest of 10% plus $1,000 5 years from now, how much could you afford to pay before the deal economically didn't make sense? You could afford to pay a price which left you with an 8% return, which net of 8% interest would leave you economically neutral. If I later told you I could now get you money at a 7% interest rate, you could then pay more for the bond, as you would only need to make only 7% on your funds to break even. Again, this ignores differences in credit risk. If you want to see the kind of complication this introduces, read the spoiler. I've hidden it because it clutters the discussion and is t relevant for most. If I told you I had two similar investments, but one company paid 8% with a BBB rating (say 1% risk of default) and the other paid 9% with a BB rating (say 2.5% risk of default), which one would be priced higher? The answer is not a straightforward calculation.. I used to teach this stuff to university students as a finance TA so hopefully that explanation makes some sort of sense. If not, the numbers will help. Re rates, it's not that they can't go down. It's more a call on likelihood and relative risks. Most rates are determined in reference to other rates, and the fundamental reference for the finance system as a whole is the central bank rate. As you know, this is currently about as low as it can go. The other component to rates is the spread, or essentially a risk premium relative to the base rates. Corporate bonds and bank debt for example are often priced behind the scenes as a spread over government of Canada bonds or over LIBOR, for example. The quantitative easing undertaken by central banks has put a 'bid' in the market for certain classes of debt securities, which essentially has had the effect of decreasing this spread. However, you may have heard the term 'tapering' in the news. This refers to the reduction over time of the level of buying support in debt markets, meaning that the spread will likely increase. In addition, if you believe an economic recovery is underway, eventually this will drive inflation up which will require the bank to respond with in increase in the underlying central bank rate. So, the two components driving the majority of interest rates to which bond funds are exposed are BIASED towards increases (no guarantees), leaving me biased towards lower bond exposure in expectation of decreasing bond prices over time. This kind of portfolio allocation is done on a much more sophisticated level in any actively managed investment portfolio. The manager, subject to the rules of the fund he or she is managing, will seek to reduce exposure to sectors or security types they expect to underperformance while increasing exposure to potentially outperforming segments. As mentioned above, generally, trying to time the market is for chumps, and particularly so on single securities, but understanding and anticipating broad, longer term sectoral moves at a macroeconomic level is something that is reasonable for an active self-investor to work into their strategy.
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Mar 30, 2014 11:11
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Way to go hyperbolic. If you had read the thread you would see that's not what I'm advocating. I initially responded to a poster who said he had a 40% bond allocation which, in light of the risks I've outlined over the medium term, felt too high. I personally hold around 20% in bonds. I'm also not saying rates are going up today, but over a reasonable investment horizon, the risks are biased more towards an increase than to a decrease. Ultimately, if you believe otherwise about rates or any other macro factors, then this should inform your investment decisions accordingly.
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Mar 30, 2014 19:10
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Mantle posted:So actually trading bonds has nothing to do with the nominal interest rates at the time, and you are actually making and losing money on change in interest rates relative to each other? So if interest rates don't change, no matter if rates are high or low, there is no movement in the bond market? And basically investing in bonds is guessing on whether interest rates are going to go up or down (simplified model, ignoring credit risk)? You're using some terms incorrectly which are confusing the issue somewhat. Let's start with basic definitions. A bond is a contract by one party to pay another party a series of pre-agreed payments, usually structured as a bond principal amount plus regular coupon (interest) payments. The party buying the bond will pay a price which reflects the time value of money of those payments. To determine the time value, you need to know the timing and amount of those payments as well as the cost of funds, or discount rate. For simplicity's sake, let's consider a 5 year bond with a 10% semi-annual coupon and a $1,000 face value. Current yields (specifically yield to maturity) for similar bonds in the market are 10%. Assuming this bond is traded on Jan 1, 2015, it would have a series of coupon payments on june 30, 2015, dec 31, 2015, 2016, 2017, 2018, and 2019 (June and dec). The principal or face value would also be paid on dec 31, 2019. The value of this bond is the PV of the coupons plus the PV of the face value, at the 10% prevailing interest rate. Sneak preview, this bond will be priced at $1,000, equal robots face value, because the coupon and prevailing rates are the same. Numerically: Price = 50/((1+0.10)^1/2) + 50/((1+0.10)^2/2) + 50/((1+0.10)^3/2) + ... + 50/((1+0.10)^10/2) + 1000/((1+0.10)*10/2) To decompose that mess, 50 is a semi-annual coupon amount ($1000*10%/2), and there are 10 of these coupon payments. The (1+0.10)^x/2 portion is the discount factor. X is the period number (coupon number), giving you exponents of 0.5, 1, 1.5, 2, etc up to 5. 1.1^0.5 will give you a discount factor of 5%, meaning your first payment of 50 on June 30, 2015 is worth about $47.5 today. You can do the math for the rest of the coupons, but the principal payment 5 years out is worth approximately $621 today. Add all that up and you get $1,000. If, for example, rates now increased to 12%, the payments agreed in the bond contract would not change, so it's still a series of payments of 50,50,50,...,1000, but you are now discounting these payments at 12%, meaning they are worth less today. For example, the first coupon would be 50/((1+.12)^1/2) = $47.25 and the principal would be 1000/((1+.12)^10/2) = $567. If you do all the math you will come up with something less than $1,000. Probably around $900, but I'll be hosed if I'm going to do it all on my phone. This is the way in which prevailing interest rates drive bond pricing.
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Mar 30, 2014 20:37
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cowofwar posted:This thread has a strong bias against bonds and I'm trying to provide some balance as reality doesn't have the same distaste for them as they function to counterbalance the risk in equities exposure primarily rather than provide returns. Bond allocation is a personal decision based on risk tolerance, expected retirement and allocation. I don't know who "this thread" is, what's their regdate? I don't think I saw them post anywhere.  One of the joys of personal finance is that there's room for different opinions and personal bias / risk tolerance. I happen to think RRSPs are generally better than Lexicon does vis a vis TFSAs, but we had a page long Personally, I think bonds are a great investment, in the appropriate allocation. If you don't know enough about them to buy directly (just like stocks) there are lots of good bond funds with varying risk and return profiles. I use a Canadian bond fund because I personally don't like USD exposure, but the Canadian corp bond market is relatively lovely and illiquid so you can get better returns and can hedge  out the currency risk if you want to consider US funds.Mantle posted:I can't believe you typed up two megaposts on a phone. Somewhere along the way, I learned how to type on an iPhone about as fast as I can think the words in my head. Maybe I just think slow. Also, I use the Awful ap which makes quoting and such easy. Formatting is hard and you have to do emotes and bbcode tags from memory. I did gently caress up and my phone autocorrected me to 'robots' in the first line you quoted. Frankly I'm surprised you read past that  quote:Just to clarify, is the last term in your Price supposed to be 1000/((1+0.10)^(10/2))? Yes quote:I plugged the numbers into Wolfram Alpha and I didn't get $1000 on the button. Why is that? https://www.wolframalpha.com/input/...%2810%2F2%29%29 Probably rounding, or date reference, or some other stupid little thing I hosed up in my numbers somewhere. quote:Anyways, if I bought a bond for $1000 as you described, would I actually be receiving the payments of $50 every 6 months + the principal of $1000 at the end of 5 years? So nominally, I would be receiving $1500 over the 5 years, but the present value on January 1 would be $1000 at 10%? And if rates went up to 12% on January 2 after I had entered into the contract at 10%, the present value of my contract would be $938.42? https://www.wolframalpha.com/input/...%2810%2F2%29%29 Yes Kalenn Istarion fucked around with this message at 06:44 on Mar 31, 2014 |
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Mar 31, 2014 06:41
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Saltin posted:I've never sensed an anti-bond sentiment in this thread. I think everyone agrees that they are a reasonable and required part of any portfolio. What that balance is, is up for discussion. Yeah, I made that point above - QE had the effect of artificially narrowing spreads. Lexicon posted:Could you elaborate on this? Curious. Personally, if anything, I'm biased the other way. Nothing specific I can point to, more of a broad consensus opinion developed off a number of different sources. Short version is that over time I expect our economy, and this dollar, to outperform, and I'm too lazy to hedge properly to take the currency risk out. I have also, over time, been burned more by my USD investments than my C$ ones, which gives me an anecdotal excuse to listen to my vague feelings. Specific bits are that I don't really subscribe to the housing doom and gloom in Canada (it's not going to be good, but I don't think it's going to crash the economy), I believe resource prices will be sustained or continue to improve (one of the main C$ drivers) and general economic improvement, while slow-ish, will eventually push rates higher, which will also have a supportive effect on the C$. I am pretty good at the guts of finance but economics is a little more fuzzy wuzzy for me. E: again, it's a matter of degrees. I have US equities, and anyone who has a Canadian index fund has material US dollar exposure (albeit indirectly) via the banks, mining and industrial companies which comprise over half of the Canadian markets. If I was going to add anything else non-C$ at this point I'd probably do euro or Asian exposure right now. Kalenn Istarion fucked around with this message at 00:26 on Apr 1, 2014 |
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Mar 31, 2014 18:55
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Saltin posted:The thing is, that's the market value of the house increasing 9.67% and it does not take into account the significant investment of mortgage interest payments, property taxes, realtor fees, land transfer and upkeep required to earn it. Other people forget to account for the fact that housing is levered. Not necessarily taking the side of housing as an investment but don't forget that 10% total return is actually a much higher equity return since you're only putting 20% down. In this example, even if your borrowing costs were 8% over the life of the loan your equity return would be greater than that.
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Apr 3, 2014 00:29
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Saltin posted:Sure, it's a great advantage as long as prices go up , and they always do, right? I know you're not coming out pro-housing per say, and full disclosure I own a place myself, but leverage can utterly ruin people too. It's not necessarily a plus, but within the context of the last 10 years, sure. I know a good number of people my parent's age that were wiped out in the 80's when interest rates went sky high. It takes forever to recover from something like that, and it's so easy to do thanks to leverage. It was said more in counterpoint to the comments that those returns would be less a lot of stuff, which is true but didn't address the full picture. Frankly there's a reason people have developed an expectation of successful real estate investments. The problem is that this expectation isn't necessarily borne out by the current economic situation. I own a property and I'm on the fence myself. A big part of me wants to just go gently caress it and sell the thing and buy more other poo poo, but I've also made out like a bandit on it (almost a 70% return since buying in '08) so I'm fairly insulated even if things go south.
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Apr 3, 2014 22:02
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