Is the 60/40 dead?

RYAN   By Guest Blogger Ryan Lewenza

.

Readers of this pathetic blog know that we have chiseled abs (well Garth anyways), prefer dogs to cats, and to our core believe in balanced 60/40 investment portfolios. The thinking is pretty simple. We invest 60% in growth assets (i.e., stocks) and 40% in safer things (i.e., fixed income). Through this mix of stocks and bonds we’re able to generate decent portfolio returns while minimizing portfolio volatility.

For decades now this strategy has been a big winner producing returns of 7-8% annually before fees. However, there are some now calling for the end of the 60/40 balanced portfolio with interest rates hovering near all-time lows. Bank of America was one of the first large US banks to make this bold prediction in their report “The End of 60/40”, with other firms like JP Morgan piling on to this investment thesis. In this week’s post I push back against their criticisms and remind readers why we believe the 60/40 portfolio is still the way to go.

Reading through some of these reports the key points to why the 60/40 is dead in their view are: 1) with interest rates at record lows there is only one way to go and that’s up, which would result in negative returns on bonds; and 2) the long-term negative correlation between bonds and stocks will begin to break down, thus bonds losing their portfolio hedging characteristics in downturns.

Let’s begin with the first point: bond yields are destined to rise resulting in negative returns from bonds in the years ahead.

Below is a very long-term chart of the Government of Canada 30-year bond yield and you can see how it has declined steadily since the early 1980s from 18% to just 1.4% today. So the simple thinking is we’re at record lows and they can only go up from here. But can they?

Long-term Chart of GoC 30-Year Bond Yield

Source: Bloomberg, Turner Investments

For some years now I’ve been in the lower-for-longer camp with respect to interest rates. In fact, I believe developed regions like the US, Canada and Europe will experience a similar fate as Japan where interest rates could remain stubbornly low for years if not decades. Here’s why.

First, the long-term drivers of economic growth are population growth and productivity gains, which are both on the decline. We’re just not producing enough babies these days (that’s one reason why immigration is so important). For example, US population growth has slowed from 1.7% annually in the 1960s to just 0.7% today. Similarly, productivity gains continue to diminish, so as these drivers decline so should economic growth. Historically, the US economy has grown an average of 3.3% annually, but I see this downshifting closer to 2% due to these macro trends. If correct, this lower economic growth should keep interest rates well anchored around these low historical levels.

Second, governments simply can’t afford higher interest rates given all the debt in the world. At last check the US has US$22 trillion in debt outstanding. If interest rates were to rise meaningfully the interest expense would skyrocket, which would put huge pressure on the US government’s balance sheet, and either lead to higher taxes and/or large spending cuts. In short, rates can’t rise materially or we’re all screwed.

US Government Debt is at US$22 trillion

Source: Bloomberg, Turner Investments

So, given I see interest rates staying lower-for-longer, I don’t see major losses from bonds in the coming years. Now I don’t see major returns either, which is why we view bonds more as a shock absorber for portfolios rather than counting on them for gains.

The reason we continue to view bonds as a shock absorber in portfolios is their negative correlation with stock prices. This can be seen visually in the chart below.

I show the rolling correlation of US Treasury bond and stock prices. For over two decades now the correlation has been negative (currently -57%) between the two, which in laymen terms means that when stocks decline bonds move higher and vice versa. This is critically why we continue to recommend investors hold high-quality bonds. And, given I see government bond yields remaining lower-for-longer, I see this relationship continuing to hold.

Correlation of US Treasuries and S&P 500

Source: Bloomberg, Turner Investments

Finally, while I disagree with BoA and other firms that the 60/40 is dead, I do agree with them that in this low interest rate environment we need to adjust portfolios to make up for the lost income from government bonds. We do this by including more corporate bonds, which pay higher yields, dividend-paying stocks and preferred shares.

In fact, preferred shares provide a great hedge in case we’re wrong about interest rates remaining low. If BoA turns out to be correct, and rates move materially higher, then our preferred share ETF will greatly benefit from this, as preferreds do well in a rising rate environment. And this hits home an important point: from time to time some of our calls will not work out and this is why we structure the portfolio using a mix of bonds, preferred shares and stocks. Each one is driven by different factors and by including a mix of these different assets it ensures we always have something that is working even if something else is not, and this is how we’re able to provide fairly consistent long-term returns for our clients.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.

 

104 comments ↓

#1 C8.R on 02.15.20 at 10:09 am

Great analysis Ryan…. Note there is a typo in the title of the post ;)

#2 FreeBird on 02.15.20 at 10:14 am

Well timed. Thx

#3 JacqueShellacque on 02.15.20 at 10:28 am

Interesting read, Ryan. If people like BoA are saying 60/40 is dead, what alternatives are they proposing?

I’ve seen a little of this in my own portfolio, but in a counterintuitive way: VSB (mostly Canadian gov’t bonds) has done nothing in the 2010s, even with interest rates low. It seems this last decade of dropping rates should’ve been great for that sort of investment.

#4 West Coast Bounder on 02.15.20 at 10:44 am

The US government can well afford an uptick in rates, after all, that can just buy back the bonds they issued with money they print….it’s Canada that’s really screwed if rates move an uptick. Trudeau’s debt is so egregious now that the country is way past bankrupt. We’re screwed and it’s no secret. As well, homeowners by and large are less than one full point away from being underwater. The current status of treading water is not good. It’s chaos unfolding, spinning out of control.

But, it’s the guys who spend Chinese government money , because they’re guys like the current Premier of China who don’t have to worry. They can buy Canada’s ski resorts with pocket fluff. The money they take from the Chinese treasury isn’t counted.

https://www.cbc.ca/news/canada/british-columbia/grouse-mountain-sold-1.4210574

#5 James on 02.15.20 at 11:53 am

Hey crowdedfarts dude…..

They need your help!

Propane shortage in the Maritimes. (Garth might even freeze in Lunenburg.)

https://atlantic.ctvnews.ca/shutdown-of-cn-rail-lines-leads-to-propane-shortages-in-the-maritimes-1.4812366

Eat some beans and grab some matches, take a plane asap to Halifax, buddy.

(See – you’re not just a useless gasbag after all!)

#6 Grunt on 02.15.20 at 11:57 am

Thank you Ryan. In my experience BoA are arrogant sods. Like to think they own everything.

#7 Alessio on 02.15.20 at 12:05 pm

Forgot one Mr Lewenza – US going to start tax incentive to buy stocks. Chiseled abs eh? Maybe when u were a Gino back in the day cruising to freestyle music.

#8 Andrew on 02.15.20 at 12:19 pm

Everything Garth hammers home everyday is important. But to me this post is probably the most critical I’ve read here in a long time.

People don’t understand the threat demographic shifts (longer life coupled with less babies), combined with the scarcity of yield have on their future.

They are living longer with a nest egg that can’t produce the yield they had been banking on. Garth references it when he says running out of money is the greatest threat but I’m glad we saw a post outlining it explicitly.

Frankfurt and Japan set interest rates globally. The US central bank can’t raise higher than them dramatically or the worlds capital will be sucked into that coupon. We all know it. American rates are going to 0.

As someone in their early 30s, I personally feel it necessary to hedge my 60/40, pref, reit portfolio with secular bear assets like physical gold and bitcoin.

There are too many possible outcomes and tipping points baked into the current system not to. From our perception it is random which outcome will finally occur, it’s impossible to hedge perfectly but banking on the status quo is borderline absurd in my own opinion. I agree with a balanced portfolio approach, but to me that means going beyond 60/40, prefs and reits.

The market will likely come calling on the extra risks taken in order to capture the necessary yield that no longer exists but it being chased by necessity. There is no perfect insurance, but reducing ones expectations and lifestyle by a hair and putting that into what I mentioned above I believe increases the overall durability of ones wealth. I wish us all good fortune.

#9 Stan Brooks on 02.15.20 at 12:20 pm

Rates are low as they do not represent interest rates on money but on coupons with expiration dates which is what central banks currencies are. No wonder bitcoin is preforming better. In fact anything, no mater how bizarre will perform better.

Real food and housing inflation is in double digits and rates on (30 years!) bonds 1.4 %?

Sure. Pass the booze. I won’t touch that POS paper or any derivative of it with a 10 yard long stock.

Investment in quality scotch is much better idea.

Too bad for the retirees whose ‘pensions’ (sorry, ‘gas money’) are indexed at 1 % (at what the ‘inflation’ is)
and for the savers, but hey, lets see what happened when we run out of idiots to support the whole Ponzi scheme and all the’winners’ – home owners, real estate cartel, banks, insurance companies, government workers with generous pensions etc.

Cheers for all Atlas shrugged idiots who refuse to give up in supporting all these parasites, great effort folks.
Let’s see how long your back and behind will sustain that ever-increasing pressure.

Cheers on Irish whiskey today.

#10 akashic record on 02.15.20 at 12:43 pm

Democratic party 60/40: Bloomberg/Hillary ticket

#11 Yuus bin Haad on 02.15.20 at 12:46 pm

The hopes of leaders in Alberta got a boost with Trudeau’s recent promise to invest heavily in the resource sector in the province of Senegal. “It’s a start.”, said one of Kenney’s lieutenants in a statement.

#12 The Great Gazoo on 02.15.20 at 12:53 pm

Thanks Ryan,

Agreed the economy would be screwed if interest rates increase. The struggle I have with the thesis of lower interest rates for longer is who is on the other side of this trade to provide ever increasing amounts of debt to meet the demands from governments and consumers alike – at these low rates.

You just described how your firm is taking steps to reduce government bonds and shift some % to dividend paying stocks and preferred shares to offset the reduced income from these bonds.

If large players like B of A and JP Morgan are advising their clients to reduce the bond component – by even a small %, overall that is a lot less debt supply to meet the ever increasing thirst for borrowing. I assume there are many more who are doing the same.

With inflation running around 2%, lenders are basically getting little if anything in real terms. How long are lenders going to be willing to do that? I get the benefit of a shock absorber, but still? As rates declined over the last decades people may have been willing to tolerate the declining income since they got a bump in the capital gain from long term bonds?

It only makes sense to me the supply would be met if rates also increased.

Appreciate if you can answer this fundamental question for me:

Where do you believe the supply of debt is going to come from to meet the existing and ever increasing demands of government, consumers and business alike – at these low rates? If you can please describe who these lenders are (people, organizations, other?) in simple lay terms that would be helpful.

#13 just a dude on 02.15.20 at 1:20 pm

Ryan, great post. Thank you.

#14 SunDays on 02.15.20 at 1:25 pm

Times have changed. The millenial 60/40 is 60% Tesla / 40% Bitcoin.

#15 Renter's Revenge! on 02.15.20 at 1:33 pm

#3 JacqueShellacque on 02.15.20 at 10:28 am

The effect of bond prices going up when interest rates go down is only temporary – they all mature at par value. It also depends on their duration and term to maturity – with short term bonds the effect is smaller and even more temporary. In the long run, all you get is the interest the bonds pay, even with an ETF.

#16 Tom from Mississauga on 02.15.20 at 1:38 pm

Preferred shares but the perpetuals, not those awful resets. REITs and trusts are fixed income replacement. Immigration bill will come in Trumps 2nd term after he wins back the House in November. Texas will vacuum capital and brains from around the world.

#17 IHCTD9 on 02.15.20 at 1:55 pm

Great post, and great backup.

#18 Ron on 02.15.20 at 1:58 pm

Interesting that you seem to disagree with Garth who believes rates are going up.

#19 Dr V on 02.15.20 at 1:58 pm

WHAT IS WITH THAT PICTURE??!!

#20 crowdedelevatorfartz on 02.15.20 at 2:10 pm

@#8 Andrew
“As someone in their early 30s, I personally feel it necessary to hedge my 60/40, pref, reit portfolio with secular bear assets like physical gold and bitcoin.”
++++

If you’re thinking about this in your early 30’s ….you’re waaaaay ahead of the curve.

Gold and bitcoin? Why? You’re in your early 30’s

#21 JSS on 02.15.20 at 2:12 pm

In life, I’ve always believed in 60/40 split.
60 for me.
But in investing, i don’t think it works as well as say 100% dividend growth stocks.

#22 Andrew on 02.15.20 at 2:44 pm

#20 crowdedelevatorfartz

I look at bitcoin as a call option on a future financial system, or perhaps a parallel financial system.

The average “world reserve currency” lifespan is 90-110 years. https://news.bitcoin.com/wp-content/uploads/2019/10/reservecurrency.jpg

The dollar is approaching 100 years as the reserve currency, we have seen the experiments taken over the past ten years. I am very bullish short term on the dollar, don’t get me wrong. But with my time horizon for investing am I confident that the purchasing power of my north american monies will hold when I am 65+, I can say I have conservatively 5-10% doubt that will be the case.

Therefore, since I do not have access to fine art or other elite means of parking money in scare assets. I choose the everymans hedge of physical gold and bitcoin.

Todays article is a great answer to those who ask why bitcoin? Because there will never be a negative yield with bitcoin.

After the next bitcoin halving this may (new supply being cut in half, happens every 4 years) – https://cointelegraph.com/explained/bitcoin-halving-explained – the disinflation rate of bitcoin will drop below that of gold and be below 2%. Continuing to make it the hardest money that the world has ever known.

Main point: if there is ever a need for us all to be rushing for the exit, I want to be watching from outside as people pour out, not trying to escape.

#23 BS on 02.15.20 at 2:46 pm

we view bonds more as a shock absorber for portfolios rather than counting on them for gains…I show the rolling correlation of US Treasury bond and stock prices.

Correct long treasuries are the most negatively correlated to stocks. They reduce volatility in a portfolio. In a major correction they will spike and give you capital to move to stocks when they are cheapest.

I do agree with them that in this low interest rate environment we need to adjust portfolios to make up for the lost income from government bonds. We do this by including more corporate bonds, which pay higher yields, dividend-paying stocks and preferred shares.

You were right on the treasuries and wrong on this. Corporate bonds, although, pay a slightly higher yield (like 1% at best) don’t have the same level of negative correlation as treasuries. Often in a major correction cooperate bonds are down graded which kills much of the negative correlation. If your objective of bonds is negative correlation stick with US treasuries in US dollars. You get the bonus negative correlation of the USD vs CAD when the market tanks. In the end the extra 1% you get from the cooperate bonds is not worth it if your objective is reducing volatility.

Rate reset prefs have also been a disaster. You pay taxes on the yield while your capital evaporates. Over the past 5 years rate reset prefs have a negative total return but you had to pay taxes on the dividends in a non registered account. Prefs are also very correlated with stocks so they tank with the stock market and do not act like bonds. Unless you believe rates will go up (which you just made a great case they won’t) rate reset prefs should be avoided. Better off with a safe dividend stock like the Canadian banks. You can get the same yield (BNS at 4.82% vs CPD 5.02%) with close to zero risk of the yield going down. Rate resent prefs yield is not safe in a low rates for longer environment which is why they have been trending down for years and will continue to trend down until rates rise.

#24 Flop... on 02.15.20 at 2:49 pm

Mrs Flop told me that if I buy chocolate at 50% off in the Valentines Day discount bin, and give it to her as a token effort, it will lead to 100% divorce…

M45BC

#25 Herkunft on 02.15.20 at 2:50 pm

Thanks for the post, Ryan! Would you be willing to share asset mix maintained in your own personal portfolio?

The 60/40 mix could be good for average client. But, presumably, that someone like you could stomach more volatility with greater returns?

#26 Nah! on 02.15.20 at 2:51 pm

I think you may be a little late with the Prefs, however it is probably not too late if you can give up the image of making it really big on regular stocks. Buy only those from large stable companies and look closely at the indicated maturity/roll over returns.
They have been very good for a regular 5-5.5% payout, for quite a few years. We plan on staying with our 50/50 regular stock/pref investment mix.

#27 Karlhungus on 02.15.20 at 3:07 pm

What about rebalancing with a 60/40 portfolio? Whats the goal? I can only see it being getting back to your original asset allocation but what does that accomplish? Stability? It doesnt seem to boost returns, although that would seem to be the case with the fact that stocks and bonds are negatively correlated (not sure I totally agree with that either)

Canadian couch potato has done some research on this and found that rebalancing between asset classes lowers returns as you are constantly selling the money makers (stocks) for the stabilizers (bonds). Curious your thoughts Ryan.

#28 Dave on 02.15.20 at 3:28 pm

Is there a KPI(s) that you are looking at for the Coronavirus that will indicate significant economic impact is on the horizon?

#29 mark on 02.15.20 at 3:43 pm

Bond convexity is a complicated topic, and different bond funds act differently.
Maybe Ryan can explain more accurately?

But as I understand, LTB(long term bonds) preform much better due to bond convexity vs a short term bond fund, in a low interest rate environment?

For example in a long term bond fund if interest rates drop(with annual coupon payments) from 20% to 19% percent the capital appreciation is about 17%!

But if rates drop from 2% to 1% capital appreciation is about 5%?!.

The numbers are dependent on bond maturity the longer the bond the more convex the curve, Ryan help please.

That being said is it fair to say that long term bonds function better than short term due to there bond convexity, in low(near 0 interest rate environment?)

I don’t pretend to know inner workings of this!.

#30 Sam on 02.15.20 at 4:00 pm

Nice read

Preferred shares ?

Ryan over a 10 yr period they have averaged just under 2%. This of course you includes the yield. Why anyone would choose this “asset class” is beyond me

#31 Science Guy on 02.15.20 at 4:01 pm

The REAL question is, why 60/40? Why not 70/30? 80/20? Let’s see the rationale for those numbers: precisely 60% and 40% rather than any other combination.

#32 NoName on 02.15.20 at 4:17 pm

#24 Flop… on 02.15.20 at 2:49 pm
Mrs Flop told me that if I buy chocolate at 50% off in the Valentines Day discount bin, and give it to her as a token effort, it will lead to 100% divorce…

M45BC

Just tell her that you don’t believe in hallmark holidays, just b-days and anyversaries if you remember. And to show her that you care and aprishiate her buy her new apron every woman’s Day on March 8. If she didn’t leave you by now it’s save to assume that she won’t in future.

I forgot to take trash and recycling to the curb on Valentine’s Day, slept on a couch and we all good today.

I attended marriage counseling so many time that I am level expert now. As I sad, if you remember is key, so when you actually remember it’s priceless.

#33 Ryan Lewenza on 02.15.20 at 4:19 pm

JacqueShellacque “Interesting read, Ryan. If people like BoA are saying 60/40 is dead, what alternatives are they proposing?”

They propose holding more equities particularly dividend paying stocks. But this entails taking on more risk which is a bad idea, especially this late in the cycle. – Ryan L

#34 earthboundmisfit on 02.15.20 at 4:21 pm

Thought you guys were “ETFs only” … no individual stocks. Wazzup?

#35 mark on 02.15.20 at 4:23 pm

Convexity of bonds part 2.

I can be happily corrected if I am not understanding this?

THE ASSUMTION OF DIMINISHING RETURNS WITH FALLING RATES IS WRONG?

Theoretical 30 yr bond with negative interest rate experiences a double the profit of one with 10% even if the change in interest rate is identical -1%?
This is due to bond convexity?

Having a hard time with this.

Cheers.

#36 Figmund Sreud on 02.15.20 at 4:24 pm

Is the 60/40 dead?
__________________________

Not at all. For the average investing schmo, such ratio is existential.

Anyway, … bit off topic, not for average investing schmo – still on investing, though: some stuff to read, embrace, … and practice!

“Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor by Seth Klarman”

… couple of snips, first:

“Successful investors tend to be unemotional, allowing the greed and fear of others to play into their hands. By having confidence in their own analysis and judgement, they respond to market forces not with blind emotion but with calculated reason. Successful investors, for example, demonstrate caution in frothy markets and steadfast conviction in panicky ones. Indeed, the very way an investor views the market and its price fluctuations is a key factor in his or her ultimate investment success or failure.”

“Overvaluation is not always apparent to investors, analysts, or managements. Since security prices reflect investors’ perception of reality and not necessarily reality itself, overvaluation may persist for a long time.”

… and link to enchilada (*.pdf file):

https://pdfs.semanticscholar.org/bf5f/5ba38c83b1b1fa46347bf8fe160e4cc4a4f1.pdf?_ga=2.30959932.2022318012.1581725285-1512655348.1534674001

Best,

F.S. – Calgary, Alberta.

#37 espressobob on 02.15.20 at 4:31 pm

Parking profit is an exercise that never gets old. Just wait for a major correction in the equity markets to figure out why your investing In the first place.

A discipline that’s harder than it appears on the surface.

#38 Ryan Lewenza on 02.15.20 at 4:33 pm

West Coast Bounder “The US government can well afford an uptick in rates, after all, that can just buy back the bonds they issued with money they print….it’s Canada that’s really screwed if rates move an uptick. Trudeau’s debt is so egregious now that the country is way past bankrupt.”

Disagree with this. Canada’s FEDERAL debt is roughly $700 billion, which is 35% of our GDP. The US is at over 100%. Yes Trudeau is spending like a drunken sailor but are federal debt is still relatively low. It’s the provinces you should be worried about. – Ryan L

#39 Sask to AB on 02.15.20 at 4:37 pm

Fantastic post, Ryan. Thanks

F56AB

#40 Ryan Lewenza on 02.15.20 at 4:45 pm

Sam “Ryan over a 10 yr period they have averaged just under 2%. This of course you includes the yield. Why anyone would choose this “asset class” is beyond me.”

The past is not a predictor of the future. And the next 10 years will be better (in part because the last 10 years have been below par). – Ryan L

#41 Ryan Lewenza on 02.15.20 at 4:50 pm

Ron “Interesting that you seem to disagree with Garth who believes rates are going up.”

Rates will go up for sure but remain low from a historical perspective. I could see the US 10-year getting up to 3% but I would still consider that low from a historical perspective. Rates will go up and down but remain in a low trading range, in my view. – Ryan L

#42 Leo Trollstoy on 02.15.20 at 5:16 pm

The investment banks talk their book

What they believe is the opposite of what they’re selling

#43 Westcdn on 02.15.20 at 5:19 pm

I met with a divorced buddy and he told me his former wife had her panties in a knot. As a widower in his 90’s her father met a younger woman by a good 10 years. Apparently he changed his will. His kids are beside themselves as the story goes she is now the sole inheritor. Personally, I find that hard to believe that he would shut his kids out. The question of “gold digger” is in the air. I am curious how this turns out as the eldest offspring is a practising lawyer.

The end of January was not kind to me with my individual share holdings. I don’t know if I will recover. I am looking carefully at the mistakes I made in 2008. The big one was to hold losers but identifying them when info is withheld…

I got lucky with a few of my option bets to reduce the sting. I will stay with the minor $500 bets. Scorecard is most miss but the winners are big – too soon to tell if I am any good. Still a meh but Tater motivates me. I still look hard at cash flow and debt to equity. As far as I can tell, there is no shortage of people trying to get something for nothing – welcome to the Hotel California.

When is T2 going to lead? There is no easy answer for all and eggs get broken. I am not afraid to own my mistakes and will make restitutions but don’t force me to make decisions to punish.

#44 Yukon Elvis on 02.15.20 at 5:25 pm

#5 James on 02.15.20 at 11:53 am
Hey crowdedfarts dude…..

They need your help!

Propane shortage in the Maritimes. (Garth might even freeze in Lunenburg.)

https://atlantic.ctvnews.ca/shutdown-of-cn-rail-lines-leads-to-propane-shortages-in-the-maritimes-1.4812366
………………………

Look at the bright side. They can smoke pot while they are out there choppin’ wood.

#45 Nonplused on 02.15.20 at 5:35 pm

#14 SunDays on 02.15.20 at 1:25 pm
“Times have changed. The millenial 60/40 is 60% Tesla / 40% Bitcoin.”

I realize you are just being funny but I don’t get Tesla. I don’t believe they can ever make money. Even if electric cars make headway in the market the first thing we’ll realize is “Whoops! We don’t have enough power to charge all these things!” Then if we imagine a major upgrade to the electrical grid is undertaken to create additional power supplies, and it would likely be on the scale of the original highway build out, Tesla really doesn’t have any proprietary technology that other auto manufacturers do not already possess, so the competition will be fierce. And then there is the problem with the batteries being too darn expensive, taking too long to recharge, and not lasting very long. And tending to combust if there is a serious accident or sometimes for no apparent reason at all. There is no way I’d park one of them in my garage.

This whole green thing is a farce. Windmills kill birds, the blades only last 20 years and can’t be recycled, solar panels also only last 20 years, and the power is too intermittent so you still need a generator on standby. And Lithium mining makes the oil sands look like an environmental cleanup operation. That will have to ramp way up if we are all to have an electric car.

#46 Dave on 02.15.20 at 5:39 pm

I’ve held 95% in dividend paying stocks for almost ten years and my avg return is 9%. I only pay $500 a year for a newsletter so my investment fees are negligible. How hard is that? Why do people pay advisors?

#47 Marcella Zoia on 02.15.20 at 5:54 pm

We’re reaching 60+40 stories of condos soon. Great to toss a chair from the top! Forget investing! I’m already famous that I get deals to do videos with Drake, Harvey Weinstein and Snoop Dogg.

Yours truly,
Marcella Zoia aka Chair Girl, Mami x0x0 and Drake’s bae

https://www.reddit.com/r/toronto/comments/f49y2n/canadas_tallest_residential_tower_revealed_for/

#48 Sunny South on 02.15.20 at 5:55 pm

Hi Ryan. Question for you about the type of bonds that you consider as part of the 40% portion of the B & D portfolio. Why do none of the blog contributors ever discuss the option of including strip bonds in a portfolio. IMHO these are excellent investment option which allows an investor to purchase $100 bonds for pennies on the dollar especially for younger investors who have long investment timeframes. It is essentially a guaranteed return as each bond is worth $100 at maturity. As the only risk is that the agency or firm may not exist in the future, buy bonds from agencies/firms that you know are not going away, i.e. Bell Canada, Ontario Hydro etc. These have worked out great for us. Just wondering.

#49 Flop... on 02.15.20 at 5:57 pm

Hey NoName, good to hear from you, still working, I mean turning up for Ford?

I see the Ford Focus and Ford Explorer winning in a handful of states but Honda is still cleaning the most clocks.

Don’t do the cheesy hallmark thing, am going away with the wife for Spring break instead.

My wife is good, I am bad.

Whenever I am in trouble I just suggest a trip to the Istria Peninsula and all is good…

M45BC

https://howmuch.net/articles/most-popular-vehicles-america

#50 Ryan Lewenza on 02.15.20 at 6:01 pm

Karlhungus “What about rebalancing with a 60/40 portfolio? Whats the goal? I can only see it being getting back to your original asset allocation but what does that accomplish? Stability? It doesnt seem to boost returns, although that would seem to be the case with the fact that stocks and bonds are negatively correlated (not sure I totally agree with that either).”

You still rebalance. Sure in a bull market you’re trimming your equities occasionally but 1) this ensures you’re locking in some gains, and 2) keeps risk constant. If you don’t rebalance over time equities will make up a larger and larger weight in the portfolio. – Ryan L

#51 Carlyle on 02.15.20 at 6:21 pm

Huh timely post today!

I started investing late, and as a result decided to go 90/10 in equities (mostly a bundle following S&P 500 — using active managed Mawer US equities fund) to make up for some lost time.

I still have a 25 year window until retirement so hoping that long term I can still win on stocks. I’m well aware though that you can lose a bundle in a downturn … my thinking is that with coronavirus effecting supply chains everywhere this is the black swan event that will sink the equity markets short term.

I don’t have a lot to lose right now as I really just started so I’m hoping a potential downturn will provide a “on sale” period to pick up lots of stocks cheap.

I’ve read many views that see to think that on a long term window eventually stocks recover even after downturn.

#52 Flop... on 02.15.20 at 6:28 pm

Garth says to do your TFSA contribution on January 2nd each year.

I usually do mine at the end of January/Early February, I pretend it’s because I’m tactically waiting to see if there is any market volatility after the State of the Union speech, but it’s really just because I’m wet behind the ears and need some help.

My Financial Advisor has been awol for the last little while as I had been trying to book an appointment to go over my minuscule portfolio.

They just emailed me today and apologized for going missing as they were self quarantined for 14 days after coming back from China.

Their employer might have made them do it, but I booked an appointment in a little while just to make sure everything is o.k.

I mean, I can’t really go into a bank with a mask on can I ?

What could possibly go wrong?

There must be some exceptions with pandemics and such, anyone on here in the financial biz have any insight?

I am not the brightest guy but I would never try to rob my bank.

As soon as the description came out, large male, over six feet tall, messed up accent, that rules out 99.7 % of the Fraser st crowd, I would be in jail within a couple of hours begging for Tim Tam biscuits…

M45BC

#53 Mr Canada on 02.15.20 at 6:30 pm

If you are a passive investor with limited knowledge and rely on a paid advisor, I agree with the 60/40 split. But diversification or 60/40 split has never worked for me. I started concentrating my portfolio on a small group of excellent companies back in my 30’s. I also invest myself, and like following stocks. If you know about the markets, “diversification” as practiced generally makes little sense — its a protection against ignorance to borrow a phrase from Warren Buffet. If you own 30 stocks, sell them and buy an ETF instead. Frankly, there is less risk identifying 3 GREAT firms vs picking 30-40 individual ones. Who made more money owning 100 shares of Apple vs 1000 ?

#54 G on 02.15.20 at 6:41 pm

Thank you Ryan always enjoy your post!

For the PM or other interested persons, COVID-19:

Is the PM and his office people paying attention and are competent??? (I guess time will tell re: COVID-19)
I hope it’s contained. If your fingers are still crossed hoping the same, maybe it’s time the Government get more proactive with the response, if that still possible at this point, never mind the dollar costs. How much is a life worth, priceless right!(At least I think so, I hope you do too.)

Our health care system isn’t that much different than Britain’s! And unlike SRAS, COVID-19 you can spread this without showing any symptoms. test kits can show false -, incubation period might actually be up to 24 day(I pray not), not just 14. Can pick it up off surface 5-9 days later. China has not be totally transparent so far with the numbers, just here the crematorium guy in the 2nd link below. But look back later, I think China is trying to get better to contain this going forward, I hope so. So moving forward I hope it is clearer? I’m sure they wish it was over soon too.

But what are we Canadians going to do to be more proactive before this gets out of hand here??? If it does take off here many more could die. Hopefully/it’s still a guess at this point, most that catch it don’t get to sick from it or a secondary infections, but at present it is not clear how many have been dying in China from this!

Coronavirus: Is Britain Ready? | Documentary Feb14 25min Channel 4 News
https://www.youtube.com/watch?v=ZBOwFBu05c8

Coronavirus Outbreak in China 10 Times Worse Than Reported? Feb 15 40min Zooming In with Simone Gao
(@14:39 is conversation with a china crematorium guy!)
https://www.youtube.com/watch?v=5-nv7j9HEgY

Coronavirus Emergency Alert CDC hiding NYS cases by Dr Paul Cottrell Feb15 1min Paul Cottrell
(It might already be in Buffalo NY, but the guy on the phone isn’t specific about which corona virus the test was able to detect for, so not sure if it’s the new COVID-19 involved or not.
But the guy from CDC on CNN yesterday said he was expecting to see it here sooner or later.)
https://www.youtube.com/watch?v=0ju7_abh5gc

I hope everyone stays well, and the people in China and the world recover sooner than later with minimum lost of life and ok lung function if you catch it and recover.

#55 Flop... on 02.15.20 at 6:50 pm

Big Boy, thanks for letting me post!

I appreciate you saving some blog bandwidth for a blue collar bum such as myself to rub shoulders with your Bored Engineers Group, or BEG for short…

M45BC

#56 Camille on 02.15.20 at 7:09 pm

I’ll start by thanking Ryan for this post. Some basic investing information that you follow, a needed reset to the most complicated information usually presented. Whether it’s what we want to hear is something to think about, but commenters have positive feedback, and interesting ideas. I’m sure Ryan could have included many other factors which could affect portfolio construction but refrained. Thanks again.

#57 Andrew on 02.15.20 at 7:20 pm

Star Wars title for bitcoin

Bitcoin, The Savers Strike Back

#58 Yanniel on 02.15.20 at 7:25 pm

I don’t know what the future holds for the 60/40 portfolio or for any other strategy for that matter.

With so many strategies out there with a decent track record and tone of research to back them, I rather “diversify” across some of them. In my opinion going all in into the 60/40 is akin putting all your eggs in one basket.

Alternatives:

– I like momentum strategies, Dual Momentum (DM) being one I like a lot and I personally use. Track record: https://www.optimalmomentum.com/global-equities-momentum/. It offers great downside protection and you can participate handsomely in the equities upside. You can back test it in portfolio visualizer.

– If you like the idea of DM and are lazy take a pick at the “Newfound/ReSolve Robust Equity Momentum TR Index”. The first page of the fact sheet is benchmarking against the traditional 60/40. See the appeal? https://www.solactive.com/wp-content/uploads/solactiveip/en/Factsheet_DE000SLA8JN0.pdf. You can buy this thing with just one ETF.

– Regimes changes (stagflation, inflationary boom, deflationary bust, des-inflationary boom). Strategies that use cross-sectional momentum (relative momentum) allow you to allocate into asset classes that would do better depending on the economic regime while dumping those that would do badly. We have been in the same regime for the last decade but at some point this will change. Have you ever wondered what something like MMT could do to traditional allocations? Beats me, but having a strategy that moves to the asset classes with the highest relative momentum is appealing. For a simple strategy see Muscular Portfolios.

PS: Momentum is not market timing.

————————————–

I do use the 60/40. Half my money is on it. Yet, below are some sobering quotes:

“The truth about the historical relationship between stocks and bonds is scary. Between 1883 and 2015 stocks and bonds spent more time moving in tandem (30% of the time) than they spent moving opposite one another (11% of the time)”

“Not only are stocks and bonds positively correlated most of the time but also there is a precedent for multi-year periods whereby both have declined”

“In the event stocks and bonds simultaneously lose value, the classic 60/40 portfolio will become a 100% loser”

“The nightmare period for negative correlation occurred between 1906 and 1909 when the 60/40 portfolio experienced a -67%peak-to-trough drawdown”

https://static1.squarespace.com/static/5581f17ee4b01f59c2b1513a/t/561dc6bfe4b0ee35464228f2/1444791999826/Artemis_Q32015_Volatility-and-Prisoners-Dilemma.pdf

————————————–

“We do this by including more corporate bonds, which pay higher yields, dividend-paying stocks and preferred shares.” – It seems to me that the real exposure and correlation to equities is higher than 60% in this portfolio given that preferreds are a hybrid of equities/corporate bonds. Also, there’s an extra allocation to plain vanilla corporate bonds which are more correlated to equities. The yield comes at the expense of more risk.

#59 Ray on 02.15.20 at 7:30 pm

#45 Nonplused#45 Nonplused
I think most “Wall Street “financial analysts do not understand Tesla. I think if you look at it as a car company and look at the financial metrics of a car company, it would be a “shorts” dream. If you look at it a disruptive force that is a pure play on all ground transportation eventually being autonomous and energized by only renewable energy, it will seem to be a bargain at these prices. I believe the next decade will bring a tsunami of disruptive technologies in transportation, DNA manipulations in health care, additive manufacturing, and fintech. Current well established companies could be financially and culturally burdened with trying to deal with stranded useless assists E.g. ICE assembly lines, dealerships, banking accounts, cancer drug companies, oil well and refineries etc.
https://www.youtube.com/watch?v=-IwXJE2ijPA

#60 Sail Away on 02.15.20 at 7:33 pm

#55 Flop… on 02.15.20 at 6:50 pm
Big Boy, thanks for letting me post!

I appreciate you saving some blog bandwidth for a blue collar bum such as myself to rub shoulders with your Bored Engineers Group, or BEG for short…

M45BC

—————————

There’s strength in diversity. Even aliens. Not just Aussie aliens, but real ones. Eks knows.

#61 Less is More on 02.15.20 at 7:50 pm

There is another possible reason why rates may not be able to rise, maybe ever again:

https://ourfiniteworld.com/2019/08/22/debunking-lower-oil-supply-will-raise-prices/

It is possible that oil prices have reached the point that they are throttling the economy, which is designed to run on ever increasing supplies of cheap energy. Yes, there is lots of shale oil out there, but it is vastly more expensive to extract than the original Texas oil fields which ushered in the age of oil were.

The key concept is “economic utility”. The price of something cannot rise to the point where it is no longer useful. If you make cars cost $1 million each, then you can sell a lot of bicycles.

It all has to do with a concept called “Energy Return On Energy Invested”. This measure can be used to calculate the true economic value of an energy resource without the messy dollars part. This measure has been steadily declining since the 70’s.

In 1910, all you needed to get you some oil was some timber and a steam engine and a few weeks later the oil would just come gushing out of the ground. The EROEI was somewhere around 100 and the oil was seemingly everywhere. This means that it took about 1 barrel of oil energy equivalent to get 100 barrels back. That leaves plenty of energy for transportation and refining and still leaves lots left over to fuel the economy. It was highly profitable and enabled vast economic expansion.

Where are we with EROEI now? Well, most of those easy access oil fields in Texas are now depleted, as is most of eastern Alberta. So now they drill down twice as far to the source rock (shale) and then twice as far again sideways, and then they frack the heck out of it. (If you have seen one of these fracturing operations, it is truly a sight to behold. 40,000 hp worth of pumping, swimming pools of water, train car loads of sand, pumping for weeks.) So you can get oil this way but the EROEI is closer to 20. After transport and refining there is much less energy available for the rest of the economy. That’s why nobody ever made any money drilling for shale. It indicates we are in a desperate situation. The other thing we have been doing is drilling increasingly further offshore in increasingly deeper waters, which also results in lower EROEI.

Now don’t get me wrong, there is still plenty of high EROEI flowing out of existing fields, and it still makes up a large portion of the energy mix. But every year there is less of it and we must produce more shale and oil sands oil or deep water to replace it. That this would happen eventually was known since the 50’s and a warning was issued by none other than Scientific American in 1998. You can find the article here but you have to pay for it:

https://www.scientificamerican.com/article/the-end-of-cheap-oil/

I’ll save you some money by summarizing it. “Cheap oil” (Light sweet high EROEI oil) would peak probably by 2008 (it peaked in 2006) and production would have to shift increasingly to unconventional supplies. Well, that is exactly what happened. Easy oil peaked and unconventional (expensive) oil has steadily increased.

But this means the economy is essentially on an energy diet. The EROEI of the overall energy supply falls a bit every year. Every year more of the economic resources available have to be put into energy extraction rather than for other economic purposes. It’s a very slow process but it has been underway for years. (It is not a coincidence that “peak cheap oil” happened in 2006 and the “great recession” happened in 2008.)

Well, where is EROEI headed? Probably to about 20. That seems to be where most alternative energy sources are like shale oil, oil sands, wind, solar, etc. And there is still a lot of natural gas with high EROEI so that will help the transition. But where we are headed is an economy that is a lot less energy dependent Green New Deal or not. At some point in the distant future each dollar of economic activity is going to have to be produced using about 1/5 the energy we did 100 or even 50 years ago. Can it be done? We will find out.

If this dire scenario unfolds as I have outlined it may be the case that inflation, real inflation that it, is permanently dead. Interest rates may never have to be used to fight it again. It also means a lot of other bleak things but I will leave those to your imagination. But to summarize, growth is over and efficiency is the way forward.

——————

The good news is that some parts of the economy are actually becoming much more efficient at a faster rate than required. For example a common smart phone has now made many devices like tape recorders, radios, cameras, GPS devices, and even computers obsolete and it fits in your pocket and uses very little power and not much more plastic than a few water bottles. LED lights are another good example. So there is hope that technology might save us or at least make the transition more tolerable.

But there are thermodynamic limits to some processes. For example it takes a certain amount of energy to move a car up a hill no matter what the energy source. The best you can do is make it lighter. That is why scooters and small motorcycles are so popular in the developing world. They can get 100 mpg with pretty basic technology. This easily represents a 5 times energy savings over most cars. And they are fun. But not exactly my first choice in the winter.

There are lots of other technologies that are going to help. Eventually all the old furnaces are going to break and the new ones are up to 40% more efficient. Old houses will be rebuilt or insulated. The long promised work from home revolution is actually gaining some traction which will dramatically reduce miles driven for some families and also cut down on the need for office space. This Covid-19 thing might eliminate the travel industry and re-localize supply chains. So there is hope. But energy efficiency will be the theme of the future even without the Green New Deal, so invest accordingly.

So what are some actionable investing items to take away from this?

Avoid airlines and vacation industries (especially during Covid)

WeWork is a stupid idea. None of those kids need to be there. AirBnB likewise. Uber might have a future as less people chose to own a car but I doubt they will beat the cab companies in the long run, who have also figured out how to make an app for your phone.

Smart phone makers will do fine. Computers might go away or at least certainly lose the consumer market. Why pay for a computer if you already have a smart phone? We are one dongle away from not needing a computer even if we want a big screen and a keyboard. Almost everything you need already fits in your pocket and I think the rest will soon.

Yamaha will do better than Toyota, electric or not (electric scooters are more practical than electric cars. You can easily charge them at home and go 100 miles.) The future is in less miles traveled in smaller cars or by motorcycle. Many people will not own a car at all.

Public transit is a growth industry. You can’t really buy public transit but you can buy the industries that build it.

Supply chains will be localized so no FoxxCon or any other Chinese investments. Probably sell Japan too.

Health is still a buy.

Green energy is still a buy but it won’t be what was hoped because it is expensive and has a low EROEI.

Lithium over gold.

The oil sands are not going away. Buy at these valuations.

Rail should do well because it is the most efficient way to transport goods by land. Trucking will suffer. Ocean transport will fall as globalized supply chains localize.

Aiding localization will be increased automation due to things like 3D printing and laser cutting tables. Watch this space. Soon, manufacturers won’t need Chinese factories because 3D printers and robots will be so cheap that everyone can have one much as they have an inkjet printer now. For many of us, they already are.

Nuclear energy is going to be back on the table in a few years as it also has an EROEI of about 20, is virtually unlimited, safer than ever, and can be located close to demand centers.

Don’t worry about population declines. The days of needing more workers are over.

Buy urban over suburban real estate. The future will be about walk-ability. If your work enables you to live in a small walk-able town even better. If you have cash kicking around buy up all the shuttered stores on main street as a long term play. The future will be about living in a way where we don’t have to drive 40 km a day for work or 4 km for a jug of milk. You might even see milk delivery become a thing again as one truck can drop off for a whole neighborhood. Grocery delivery is the thing to watch here, it won’t be just milk. One truck can go around to every house now that we have the internet, so the Co-op parking lot may now be redundant. And it could be electric, since it can charge while it is being loaded.

All government debt will eventually be defaulted on as a matter of expediency and when it happens it will be quite popular with the majority of voters, who don’t hold any of it anyway. It will be seen as “taxing the rich” and”making them pay their fair share”. You will be able to see it coming if rates on government debt start to rise but the Fed rate stays low. This indicates the risk is rising. But this won’t happen for many years and inflation might be the way out.

When governments default on their debt, CPP & OAS may be done as well. But the overall economic impact is uncertain because the government will lose 2 unsustainable burdens at once and hence so will the taxpayers.

Along with the theme of localization, short term is different from long term in the military space. For now Northrop and Boeing are buys, but long term the US is going to lose interest in the Middle East and bring the troops home (and then lay them off). It’s all about the oil. No oil, no interest.

On that theme, Alberta is a buy at some point in the future. If you have long term money, put it there. Canada has the third largest reserves in the world, and every single barrel is coming out eventually, environmentalist be damned. Everyone loves the Green New Deal up until the point it means they cannot drive to the grocery store or heat their house.

You can see the trend here. The future will be defined by the phrase “less is more”. Anything that does more for less is a buy. The rest isn’t.

#62 Stone on 02.15.20 at 7:51 pm

#40 Ryan Lewenza on 02.15.20 at 4:45 pm
Sam “Ryan over a 10 yr period they have averaged just under 2%. This of course you includes the yield. Why anyone would choose this “asset class” is beyond me.”

The past is not a predictor of the future. And the next 10 years will be better (in part because the last 10 years have been below par). – Ryan L

———

Considering a pref ETF such as ZPR, it has had an average return of -1.27% since its inception date of November 14, 2012, would it not be fair to say that it has acted more like an equity versus a fixed income product without the benefits of an equity? Also, if that is so, is it also fair to say that the 60/40 portfolio espoused by this blog actually resembles more a 72.5/27.5 to 75/25 portfolio considering the pref ETF component as equity?

On that basis, wouldn’t you actually be supporting BoAs thesis that the 60/40 portfolio is in fact dead?

#63 Sam on 02.15.20 at 8:07 pm

The past is not a predictor of the future. And the next 10 years will be better (in part because the last 10 years have been below par). – Ryan L

………….

so for this next decade expect, say, 3.5% returns instead of under 2%? :)

keep in mind they stunk in 2008, PUNISHED during the crash–so if its late in the cycle, and given their sensitivity to market downturns why hold preferreds again?…interest rates will be chronically low for a long long time, as the Japanization of the Rest of the world continues

gl to you, but cpd is a BIIIIIIG no for me!

#64 Nonplused on 02.15.20 at 8:08 pm

“If you don’t rebalance over time equities will make up a larger and larger weight in the portfolio. – Ryan L”

Until they don’t. Just thought I’d add that. Which is why you rebalance and diversify. It’s that day it hails when you wish the car was in the garage. Or that you had a garage. Or at least insurance.

#65 G on 02.15.20 at 8:26 pm

Hi #52 Flop…
re: “They just emailed me today and apologized for going missing as they were self quarantined for 14 days after coming back from China.”

Why not go in with a mask on, really! An N95.
Just don’t hand them a note asking them to give you all there money. LOL
If this all blows over you guys can laugh about wearing a mask to see him next year.
Have you gotten yourself an lysol wipes yet? Glove and goggles?
Do make a point of thanking him for his honesty!
And glade to here he isn’t feeling ill. I hope the people he has/knows in China are all ok still.
Can he do an online meeting with you instead maybe?
If it was me I’d give him an extra 10 days, but I’m just a big chicken, when it come to engineered viruses on the run. But what do I know, no letters in front of my name.

#66 Frank Pentangeli on 02.15.20 at 9:01 pm

Nice read

Preferred shares ?

Ryan over a 10 yr period they have averaged just under 2%. This of course you includes the yield. Why anyone would choose this “asset class” is beyond me

I would never own preferred shares, you get the worst of both worlds: all the risk of mediocre stocks coupled with the return of bonds. If you need proof just put up a 10 chart of CPD or ZPR, and compare it to any quality dividend growth stock. You would have to have rocks in your head to want to own this ridiculous asset class. It’s the total return over time that matters, who cares if preferred pay a 4% dividend when you when you’ve lost 30% of your initial investment over the last 7 years.

#67 Heavily Drinking on 02.15.20 at 9:17 pm

Kinda off topic but really not, it is affecting all of us. Is there anyone on this blog happy with T2?

I really want to understand his way and Butts way of running this government (yes, Butt is very much in control); I really think this guy needs help and I am being genuine about this; seriously no so called modern leader would run/should a country like this; it is going to be catastrophic. As Garth mentioned the other day” where the hell is the opposition to all this”?

#68 Sail Away on 02.15.20 at 9:38 pm

#66 Frank Pentangeli on 02.15.20 at 9:01 pm
Nice read

Preferred shares ?

Ryan over a 10 yr period they have averaged just under 2%. This of course you includes the yield. Why anyone would choose this “asset class” is beyond me

I would never own preferred shares, you get the worst of both worlds…

———————————

Frank, there’s a time and place for everything.

Following are my preferred purchases this year:

BAM.PR.S: yield 7%, bought Oct 19 for 14.52, currently 15.51, total gain to date: 8.53%

TA.PR.H: yield 8%, bought Oct 19 for 16.19, currently 17.22: total gain to date: 9.14%

ALA.PR.G: yield 6.1%, bought Jul 19 for 16.09, currently 17.40, total gain to date: 11%

CPD: yield 4.95%, bought Jun 19 for 11.98, currently 12.37, total gain to date: 5.75%

TA.PR.J: yield 7%, bought Jan 2020 for 18, currently 17.76, total loss to date: -1%

BBD.PR.D: yield 7%, bought Dec 19 for 10.84, currently 9.36, total loss to date: -12%

I consider these very nice holdings this year. BBD turned into a turd, but sometimes this happens. It’s actually regained 6% and might come back…

#69 AACI Home-Dog on 02.15.20 at 10:16 pm

#61; Less is More…
do not forget electric bicycles. good ones cost $4,000 plus, but are well worth it.

#70 NoName on 02.15.20 at 10:44 pm

@flop

Istra peninsula, sister took this pic bit more south. I aksed her how much, she replayed around 7.50cad.

https://imgur.com/a/iZ35Y8D

#71 CEW9 on 02.15.20 at 10:55 pm

#12 The Great Gazoo on 02.15.20 at 12:53 pm

Where do you believe the supply of debt is going to come from to meet the existing and ever increasing demands of government, consumers and business alike – at these low rates? If you can please describe who these lenders are (people, organizations, other?) in simple lay terms that would be helpful.

The Federal Reserve (BoC for Canada) are, and will remain, the “buyers of last resort”. They lend when no other institutions are willing or able.

#72 Ponzius Pilatus on 02.15.20 at 11:37 pm

#61
less is more.
Your post is more is less.
Reduce your carbon foot print

#73 Ponzius Pilatus on 02.15.20 at 11:42 pm

Flop.
This can’t be u.
Way too funny.
Not the pink bs anymore.
Welcome back

#74 Steve French on 02.15.20 at 11:56 pm

Hi Ryan:

G’day from Down Under.

Australia has recently come out with a “preference share” option:

See HBRD.

Any reactions to this ETF?

How about the rest of the GF blog dogs?

Smoking Man, any views?

Steve-O

#75 Shawn Allen on 02.16.20 at 12:18 am

Investing corporate profits

Sail Away quoted me and asked:

I was in a position to let my small corporation earnings compound and not pay much out at all. That deferred taxes. In the business I buy stocks for capital gains and hold those deferring corporate tax also.

——————————–

???

How is that beneficial in a corp? If there’s pure capital appreciation on equities, a non-reg account does the same.

**********************************
I am not a tax expert by any means. But understand I am talking about investing earnings I made in a corporation. I buy stocks rather than pay that money out and get taxed (personally) immediately.

I can then buy stocks and pay no tax on unrealized capital gains until I sell the stocks.

I can’t say for sure if this is superior to paying out the earnings and taking the tax hit and investing in taxable personal account. I can say what I do is leave the profits in the corporation and invest.

I should really measure those investment assets (the net worth of my corporation) on an after tax basis. All investments should be valued after tax but almost no one does this. People think of $200k in RRSP as same as $200k in taxable account. In reality the RRSP will almost certainly face higher tax. People are poorer than they think.

#76 Longterm on 02.16.20 at 12:58 am

#61 Less is More on 02.15.20 at 7:50 pm

Excellent analysis. The one big picture bit you left out though is global heating and climate change. Imagine a vise. One side of the jaw is the dropping EROEI and the other jaw is rising carbon in the atmosphere. Civilization is between the jaws. Right now we need to burn all that oil to maintain stability but the more we do the more we turn the vise handle. Right now we don’t have the economic, infrastructure, social and political resiliency to leave it in the ground – no growth and social collapse follows – but the more we burn the more we head towards catastrophic climate change and social collapse, likely kicked off by cascading collapse in the global food system. We’d better get out collective thinking caps on.

#77 Ronaldo on 02.16.20 at 2:28 am

#61 Less is More

You get the prize for the longest post ever.

#78 Shannon Beltron on 02.16.20 at 3:16 am

Thx , Ryan, for finally admitting that you are speculating with your portfolio . Your choice of ETF in sectors doesn’t protect the portfolio from loss. You’re merely hoping to mute the effect of a mistake or change. I don’t understand why you reject the upside of buying individual stocks ? You do your clients no favors by limiting growth in seeking safety. You must up your game and pick better stocks or hire a specialist to do so.

I have a diverse portfolio including preferred shares. However 99% of my portfolio is dividend paying equity. I’m not rubbing your nose in anything, but my returns are more than 300% greater than yours. I also have had issues not work out, but overall I’m right 71% of the time on a multi-year basis. I suggest you reconsider following the antiquated 60/40 based on MPT.

#79 crowdedelevatorfartz on 02.16.20 at 8:14 am

@#77 Ronaldo
“#61 Less is More
You get the prize for the longest post ever.”
++++

Yep.
And a 1st prize for the most “scrolled past” post ever.

“Less is More” should learn to embrace his name …. as I have…..

#80 Bytor the Snow Dog on 02.16.20 at 8:53 am

#59 Ray on 02.15.20 at 7:30 pm sez:

“#45 Nonplused#45 Nonplused
I think most “Wall Street “financial analysts do not understand Tesla. I think if you look at it as a car company and look at the financial metrics of a car company, it would be a “shorts” dream. If you look at it a disruptive force that is a pure play on all ground transportation eventually being autonomous and energized by only renewable energy, it will seem to be a bargain at these prices.”

—————————————————————–

Energized by only renewable energy? LOLOLOL! In 70 years maybe.

#81 SoggyShorts on 02.16.20 at 8:59 am

#75 Shawn Allen on 02.16.20 at 12:18 am
It will of course vary, but drawing from a portfolio in retirement should have a really low tax rate.
In a year where you draw from your RRSP and face income tax you top it off with TFSA withdrawals to balance at a lower tax burden.
Other years you draw from non-reg which is a combination of dividends, cap gains and return of capital which should be cheap as well.

I also have the corporate Investment issue though– almost half of my portfolio is in there and i plan to draw almost all of it out over the next 5 years despite the tax hit because I’m afraid that bill&t2 will screw me over if I don’t.

Maybe it’s dumb to take a guaranteed hit in case of a maybe one later… Honestly I’m unsure.

#82 crowdedelevatorfartz on 02.16.20 at 9:08 am

I just realized who the person in the blog pic at the top of this post reminded me of….. Trudeau after the next election…

#83 G on 02.16.20 at 9:22 am

From clothes to condoms: Coronavirus is threatening global consumption in ways you never knew were possible https://www.rt.com/news/480901-coronavirus-shortages-unexpected-factories-china/

#84 Ryan Lewenza on 02.16.20 at 9:31 am

Sunny South “Hi Ryan. Question for you about the type of bonds that you consider as part of the 40% portion of the B & D portfolio. Why do none of the blog contributors ever discuss the option of including strip bonds in a portfolio.”

We use a mix of government, provincial and corporate bonds. We sold our high-yield bond position as we’re reducing risk in portfolios. We’ll load back up on those in the next downturn. We keep things simple and just buy pain vanilla bonds versus strip bonds. We like receiving the semi-annual interest payments, which our retirees can use to fund their retirement spending needs. – Ryan L

#85 Andrew on 02.16.20 at 9:46 am

Paper on “How passive investing shapes active management”

https://research-doc.credit-suisse.com/docView?language=ENG&format=PDF&sourceid=csplusresearchcp&document_id=1069243631&serialid=0hSL%2FQQ7abnxREyRxfdJprrzcdpMOh%2BrW05DCccOSvvKdCtOP8ZSpoZZsUnWfTew&cspId=9206372446587650048

#86 Shawn Allen on 02.16.20 at 9:55 am

Where will the lenders come from?

#12 The Great Gazoo on 02.15.20 at 12:53 pm

Where do you believe the supply of debt is going to come from to meet the existing and ever increasing demands of government, consumers and business alike – at these low rates? If you can please describe who these lenders are (people, organizations, other?) in simple lay terms that would be helpful.

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Great question here and in your full post at 12.

Unlike many who post here I am still learning and pondering things. Here is my current understanding subject to change as I learn.

The willingness of lenders to lend at 2% is a great imponderable. The notion that rates can’t rise because there is too much money owed and too much more debt demand defies the basic rules of supply and demand. So I reject that argument.

On this blog it has been established that the money supply and deposits are created largely by lending.

The supply of money to lend is driven by the risk appetite of lenders. Deposits created by lending do leave the original particular lending bank but remain in the banking system at large. Money, even when spent or invested, generally lands in some bank account. Money gets created and moves around constantly but seldom leaves the banking system as a whole.

If Joe buys stocks rather than bonds, the cash still may never leave the banking system (could be in a corporate owned bank account) and is still funding loans. Yes deposits do fund loans even though created by loans.

Banks can profit at very low rates due to massive leverage and low defaults. If we ever get higher defaults then bank profits will fall and they will turn back the lending taps. And of course banks face no default risk on most mortgage lending – CMHC. No risk and allowed to leverage bank share owner equity about 25 times leads to massive appetite to lend on CMHC mortgages. (As low as 4% bank share owner equity is allowed see Royal bank even though they call it 9% on a risk-weighted basis).

Inflation is low and this has been a big part of the reason for low rates.

Depositors can shop for higher rates on deposits and bonds but generally don’t find them except from risky investments.

I am increasingly with Ryan that interest rates may rise but won’t soar. But if the bank’s appetite to lend goes down a lot, then watch out. So far, little sign of that.

#87 Xi Presidente on 02.16.20 at 10:13 am

BANNED

#88 Shawn Allen on 02.16.20 at 10:16 am

Why the low rates?

And I agree central banks certainly have had a big influence. So government as borrower can force rates down via central bank and that does ruin the usual supply / demand equation.

I don’t understand why so many investors are still willing to hold long term bonds at very low rates. Garth says they hold for stability. And some hold because they are basically obligated to (life insurance companies).

When/if the tide turns and those bonds give capital losses then perhaps a buyers strike will snowball. Time will tell.

#89 Dr V on 02.16.20 at 10:48 am

81 soggy – been looking at different scenarios with my advisor. Will have all those sources you list to draw from. The rrsp is used more in the first couple of years until full pensions and age benefit kick in.

There is a sweet spot for your corps dividends between 35-41k. Elligible divvys are zero tax up to 49k so you and spouse could pull almost 100k tax free. Crazy!!

After the first few years our overall tax rate drops from 15% to less than 5! So our planned retirement income is equivalent to a working wage of over 90k.

Is that picture gone yet? I’m afraid to look.

#90 Yanniel on 02.16.20 at 10:51 am

Thanks for the link #85 Andrew. Interesting read.

#91 Dharma Bum on 02.16.20 at 10:55 am

Funny.
Christopher Lee looked pretty handsome back in the day!

#92 Damifino on 02.16.20 at 11:40 am

#80 Bytor the Snow Dog

Energized by only renewable energy? LOLOLOL! In 70 years maybe.
———————————-

I use the acronym CARS to remind myself of all the attributes a realistic replacement for fossil fuels must have:

C: Cheap
A: Abundant
R: Reliable
S: Scaleable

There’s no deal without ALL of them. So far Nuclear looks like the best bet for the future (google thorium reactors). Hydro is promising too but in only places where it’s feasible to build appropriate dams, like my province, BC.

Hydro and nuclear (both with zero carbon emissions) are hated by the Greens. Tells you something.

#93 The Great Gazoo on 02.16.20 at 12:01 pm

#71 CEW9

Thank you for your response to my post #12

“The Federal Reserve (BoC for Canada) are, and will remain, the “buyers of last resort”. They lend when no other institutions are willing or able.”

I don’t disagree and think this is likely an important source of lending, but sure sounds like “Modern Monetary Theory”. I think there is a price down the road if too much of lending comes from this source. But don’t take my word for it, below is an excerpt from a recent speech by Stephen Poloz – Governor Bank of Canada.

https://www.bis.org/review/r191220d.pdf

“Before I conclude, though, let me mention one topic that has garnered a lot of interest lately: Modern Monetary Theory.

Essentially, the idea is that governments that can issue their own currency can never go bankrupt. Accordingly, rather than borrowing from the public by issuing bonds, governments should spend as much newly issued money as needed to keep the economy growing and maintain stable inflation.

This sounds like Modern Monetary Theory is offering a free lunch, and most of us know there is no such thing. First, the idea is not monetary. Government spending is a fiscal decision, not one for the central bank. Second, the idea is not modern. It has been tried many times in the past,and the record is not pretty.

For example, in the late 1960s the US government was running large fiscal deficits to finance the war in Vietnam. This led to very rapid money creation. The result wasa breakdown of the Bretton Woods system of fixed exchange rates and a surge in global inflation spanning the 1970s.”

#94 SoggyShorts on 02.16.20 at 12:02 pm

#89 Dr V on 02.16.20 at 10:48 am

There is a sweet spot for your corps dividends between 35-41k. Elligible divvys are zero tax up to 49k so you and spouse could pull almost 100k tax free. Crazy!!
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Yup, and I think T2 is increasing the basic personal amount too, right? So 30k in cap gains = 15k income = zero tax?

#95 Figmund Sreud on 02.16.20 at 12:05 pm

Paper on “How passive investing shapes active management” – #85 Andrew on 02.16.20 at 9:46 am
____________________

Germane: podcast from BloombergMarkets OddLots suggests index investing is basically one big Ponzi scheme! It’s just one man’s opinion, but still, worthy of landing an ear:

https://podcasts.apple.com/ca/podcast/odd-lots/id1056200096?i=1000465135955

Enjoy, … or not!

F.S. – Calgary, Alberta.

#96 G on 02.16.20 at 12:12 pm

(FYI…if true…WTF…were F’d. I hope isn’t wrong!)
Is the PM paying attention? I hope so!

Coronavirus CDC coverup in NYS (6 cases) by Dr. Paul Cottrell Feb 16 22min
https://www.youtube.com/watch?v=ejULhB69zLs

BOOM Scientists Now Say Coronavirus Probably Man Made From Chinese Lab, Its Gunna Get BAD
Timcast Feb16 21min
https://www.youtube.com/watch?v=_FRRgKBBmAE

#97 The Great Gazoo on 02.16.20 at 12:24 pm

#86 Shawn Allen

Thank you for your response to my post #12.
I fully agree with this part of your response.

“The willingness of lenders to lend at 2% is a great imponderable. The notion that rates can’t rise because there is too much money owed and too much more debt demand defies the basic rules of supply and demand. So I reject that argument.”

Still struggling to fully understand the big picture and who all the lenders are going to be to keep rates low. In my view there must be tension building in system. On one hand there that is a huge and growing demand for borrowing, but also at low rates. If governments are just printing money that carries with risk as per my earlier post on Stephen Poloz speech.

From the lenders point of view they are basically get little is any benefit in real terms – by lending at under 2% for 10 years, for example. How long are they prepared to do that?

I do believe rates need to move up even modestly to respond to provide some real return for lenders. I do agree that rates of even 10 years ago are hard to imagine.

This is such an important issue – and will have a material impact on our economies. I surely don’t have the answer. Welcome any insights from others on this board.

#98 NoName on 02.16.20 at 12:46 pm

#59 Ray on 02.15.20 at 7:30 pm

next decade disruptive technologies

Every decacade you can say that… As for tesla i mean electric car has a way to go, et someone smarter than me and aks hi to explain you guarding and safety systems in factories than just imagine implementing same standard around one car.

If car will not up their manufacturing and safety standards up to airplane levels (boiong excluded) noone should ever trust them.

And here is electric going camping, interesting video. cant even pull small trailer… 22min
https://www.youtube.com/watch?v=-cvNfmL7XQg

#99 Yukon Elvis on 02.16.20 at 12:47 pm

#89 Dr V on 02.16.20 at 10:48 am
81 soggy – been looking at different scenarios with my advisor. Will have all those sources you list to draw from. The rrsp is used more in the first couple of years until full pensions and age benefit kick in.

There is a sweet spot for your corps dividends between 35-41k. Elligible divvys are zero tax up to 49k so you and spouse could pull almost 100k tax free. Crazy!!
……………………………..

You might want to look into that a little further.

https://business.financialpost.com/personal-finance/you-can-earn-50k-in-tax-free-dividends-but-theres-a-catch-you-cant-have-a-job

#100 Shawn Allen on 02.16.20 at 1:12 pm

Pity those with government Defined Benefit pensions?

#94 SoggyShorts on 02.16.20 at 12:02 pm
#89 Dr V on 02.16.20 at 10:48 am

There is a sweet spot for your corps dividends between 35-41k. Elligible divvys are zero tax up to 49k so you and spouse could pull almost 100k tax free. Crazy!!
************
Yup, and I think T2 is increasing the basic personal amount too, right? So 30k in cap gains = 15k income = zero tax?

*********************************
Not all, but a large number of government workers end up with DB pensions of $50k and 75k is not that unusual.

Then they/we can’t take advantage of the low taxes on dividends. Unfair?

And what if they also have a sizable RRSP built up even with the low amounts they were allowed to contribute? Just no way to escape taxes over 30% at least and often 40%. And then there is the clawback of 15% (about 9% after considering it is not taxed when clawed back). Looking at 40% to 50% marginal tax rate. In that case even dividends get hit I think over 30%?

Oh the inhumanity!

Should there not be pity for these folks?

#101 NoName on 02.16.20 at 1:44 pm

Addendum to my post.

https://twitter.com/jsblokland/status/1229108210138779649/photo/1

#102 Shawn Allen on 02.16.20 at 2:03 pm

Is Bombardier Dead?

So is Bombardier finally admitting it is totally broke and worthless?

Its balance sheet shows a net worth of Negative $7.7 billion.

They just agreed to sell remainder of C Series for some $600 million which just contributed a billion or more loss to that negative net worth.

Today, the report is they will sell the train division for some $7 billion. I strongly suspect that is far less than it is on their books for.

They may also be selling the business jet operation.

That would leave nothing.

I fear there will not even be enough cash to pay the debt. Common share owners may get zero. Even preferred share holders may get zero.

We should know soon.

Quebec and the feds will be interested in protecting jobs. They are unlikely to have a care for investors and rightly so.

#103 Spacc on 02.16.20 at 6:53 pm

Gut feeling is that in the short/medium term they could be “right”, or something could happen in that timeframe that makes their call look right…eventually the call will prove to be wrong but everyone will have forgotten about it.

#104 theoryAndPractice on 02.17.20 at 6:45 am

#66 Frank Pentangeli on 02.15.20 at 9:01 pm
…. It’s the total return over time that matters, who cares if preferred pay a 4% dividend when you when you’ve lost 30% of your initial investment over the last 7 years.
============

Ditto. It is free money lending for the duration of 7 years.