My Portfolio – Asset Allocation for Fixed Income

Today I’ll talk about the fixed income or bonds portion of our portfolio which represents 25% of the entire portfolio. This section of the portfolio is a combination of GICs, real return bonds ETF (iShares XRB), short term bond ETF (iShares XSB), and a bond mutual fund.
The 25% bond portion is made up of 20% bonds (see detail list below) and 5% real return bonds. Note – real return bonds are referred to as treasury inflation-protected securities in the US.  I don’t know if the real return bond allocation is high enough so if anyone has any thoughts then feel free to let me know. According to Bernstein and this from Canadian Capitalist, long term bonds are not worth owning because they don’t give a return that matches their risk (historically at least). With this in mind, I’m planning to buy the XSB ETF (short term bond – duration 2.56 years) in order to lower the average duration of our bond portfolio to an estimated 3.5 years. I could lower it further by owning less of the bond mutual fund and buying more of the ETF but this is what I have for now.

These are the weightings of each security as a percentage of the entire portfolio:

GICs – five years or less – 7%

Bond mutual fund duration 6 years MER = 0.65% , 5%

Short term bond ETF duration 2.56 years, MER = 0.25%, 8%

Real return bond ETF – MER = 0.35%, 5%

In case you’re wondering why we own GICs, a mutual fund and an ETF for the non-real return portion of our fixed income, the GICs are my wife’s, the mutual fund is very useful for rebalancing, and the ETF has a low duration and a low cost.

One other thing I learned recently about fixed income – when buying or renewing GICs you can negotiate the rate and can often get a quarter or half percent more.

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