Q&A: Switch bonds for banks?

Question: May I have your opinion on the following? My wife and
I have a sizable amount of money in bond funds within each of our RRSPs and RRIFs.
Bond funds have not done very well over the past few years. Bank stocks are down
over their 12-month highs. What is your opinion on transferring a large portion
of bond monies to bank stocks?

I realize you don’t want to get into advising people on their personal portfolios
so the question is generic. Might bank stocks be a partial alternative to bonds?
– T.O.

Gordon Pape answers: Frankly, I fail to understand your logic.
Bonds and stocks are two entirely different asset classes. You are contemplating
a significant reduction in the bond weighting in your plans and a corresponding
increase in the equity weighting. As a general rule, I would not encourage this,
especially in registered plans. By definition, you would be adding risk.

Bonds are an integral part of any well-balanced investment portfolio. Yes,
they occasionally go through a difficult period when interest rates rise and
we are seeing that now. But over the long haul, they are a stabilizing force
within a portfolio and provide decent (but of course not spectacular) returns.
Over the 15 years to June 30, the average Canadian bond fund generated an annual
gain of 6.4 per cent and some of the low-MER funds did much better. The Phillips,
Hager & North Bond Fund, for example, posted an average annual compound
rate of return of 7.6 per cent during that time. My view is that the average
investor should not try to time the bond market by trading bonds and bond funds.
Decide on a basic bond weighting and stay with it.

As for bank stocks, yes they have come off a little. Like bonds, they are interest-rate
sensitive so if rates rise more, bank stocks could pull back further. That said,
Canadian banks have proven over the years to be excellent long-term investments.
I would not discourage anyone from owning them. However, they are not a proxy
for bonds – they are a completely different type of security.

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