Rate of Return: 7.3%
This is a bad time to be holding bonds. Interest rates are rising as bonds are selling off around the world.
It’s times like this when the temptation is to throw the concept of a balanced portfolio out the window and stick with equities. But that’s a risky idea. The stock market is basically being supported by technology and, at least for the moment, energy. If either link breaks, the result could be nasty.
So, we still need bonds in a balanced portfolio. But at this point, think of them as a line of defence. You’re not looking for big returns from your bonds. Something close to breakeven will suffice in these conditions. If the stock market turns bearish, your bond holdings should ease the shock.
Short-term bonds and inflation-protected issues should be part of your fixed-income mix. Long-term bonds take the brunt of the losses in selloff situations.
The classic balanced mix is 60%/40% between stocks and bonds/cash, but this will vary in individual cases. The important thing is to ensure you don’t abandon bonds at this point. The situation may look very different a year from now.
We created our Balanced Portfolio several years ago, in September 2011. It offers a conservative mix of stocks, fixed-income securities, and cash. Normally, this type of portfolio tends to underperform when stock markets are strong but reduces risk when bear markets emerge.
The portfolio had an initial valuation of $25,027.75. The goal was to achieve a return that at least matched the best available five-year GIC rate plus two percentage points.
That means the target varies with the rise and fall of interest rates. The best five-year rate we could find right now is 4%, which would make our current target 6%. We’re doing better than that.
Comments: The portfolio recorded a strong gain of 15.9% in the latest period. It is now valued at $67,231.73.
The cumulative gain since inception 14 1/2 years ago is 168.6%. That works out to an average annual compound growth rate of 7.31%. That’s better than our target.
Changes: Our bond funds aren’t doing great. but they are holding their own in a tough market. Right now, our equities are supporting the portfolio.
Given the geopolitical situation, it would be prudent to add some inflation-protected securities to our mix. I’ve selected the iShares 0-5 Year TIPS Bond Index ETF (TSX: XSTP), which invests in short-term US Treasuries whose face value and coupons rise with inflation.
We’ll sell our position in XIG for a total of $4,263.91, including retained earnings. We’ll use the money to buy 100 units of XSTP at $42.89, for a cost of $4,289. We will take $25.09 from cash to make up the difference.
We’ll use some of our retained income as follows:
XHY – We’ll buy 10 units at a cost of $163.20. We now have 470 units, with retained earnings of $147.30.
XBB – We will add 10 units at $27.93 for a cost of $279.30. We now own 220 units, with retained earnings of $55.04.
XSH – We’ll buy 15 units for a cost of $285.15. We now own 395 units and have retained earnings of $45.07.
We have cash and retained earnings of $4,004.13 which we will deposit with Neo Financial at a rate of 3%.
Here’s a summary of the securities we currently hold and how they performed over the period since I last reviewed this portfolio in November. Prices are as of the afternoon of May 21.