Hey, did you catch the big increase in bond yields in recent days?
The five-year Government of Canada bond yield has moved up to 0.55 per cent from 0.4 per cent at the beginning of the year. By bond market standards, that’s pretty big. But not big enough to satisfy a reader I’ll call the rebalancing rebel.
“I know at 65+, I’m supposed to load up on bonds and fixed income and unload on equities,” he wrote. “Given the high return on equities versus nothing on bonds, how do I convince myself to cash in the high return stocks and park my money on something with next to zero returns?”
Has there ever been a less appealing time to rebalance a portfolio, a process where you sell some of your best holdings to buy more of your weakest performers? The goal is to bring holdings of stocks and bonds back to the ideal mix for your age, needs and risk tolerance. But selling stocks today to buy bonds seems like throwing money away.
In the three months to Jan. 31, the S&P/TSX Composite Index produced a total return of 12.1 per cent and the S&P 500 made 13.6 per cent in Canadian dollars. Meantime, the FTSE Canada Universe Bond Index eked out a total return of 0.3 per cent. Total returns mean the change in price of stocks or bonds plus dividends or bond interest.
So, how does the rebalancing rebel convince himself to sell a little of his stock market holdings to buy some more bonds? One inducement – okay, a small one – is that bond yields do seem to be moving higher for now. Another thought is that higher yields are available in investment grade corporate bonds. The FTSE Canada All Corporate Bond Index had a total return of 1.9 per cent for the three months to Jan. 31.
The best reason to rebalance, painful as it may seem? It’s all about protecting the great gains the stock market has made since the crash last winter from the next big downturn. There could be many more good days for stocks before this downturn happens, but there are also signs of overheating in the market. One of them is the tsunami of retail investors who are opening brokerage accounts to trade stocks.
If you started out as an investor with an intelligently thought-out portfolio divided 70 per cent in stocks and 30 per cent in bonds, then hold to that by rebalancing. Letting big stock market returns shift your portfolio to an 80-20 mix may feel good now, but you won’t like it a bit in the next stock market crash.
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