Why not chuck bonds funds?

Zoomer | January 1st, 2006

Question: You have explained that seg funds are not worth their added costs for a bond or balanced fund, but what about taking the fixed-income portion of a RRSP and moving it into a seg fund returning 20% or better? There are many of them out there, in all different areas of investing. Wouldn’t this make more sense than losing money or having very little return in a bond fund?

Answer:

You talk about “losing money or having very little return from a bond fund”. That has been the case recently, but it’s not always true — not by a long shot. In fact, over the ten years to Dec. 31 the average Canadian bond fund recorded a gain of 8.5% a year. The average large-cap Canadian equity fund gained 8.8%. Very little difference!

The guarantee on a seg fund only comes into play after 10 years (or at death). So if you choose a poorly-performing fund, you’re stuck. If you knew a fund was going to return 20% annually, great — but who can predict that? It may turn out to be a dud. Would you really have wanted your money in Industrial Growth Fund, which returned an average of 3.2% a year over the past decade, guarantee or not? The worst Canadian bond fundveraged 5.6% a year over that time.

I have always counseled a balanced approach towards investing, and still do. Flexibility is also important.