The MapleMoney Show » How to Invest Your Money » Bonds

The High Risk of Bonds with Ed Rempel

Presented by Willful

Welcome to The MapleMoney Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. I’m your host, Tom Drake, the founder of MapleMoney, where I’ve been writing about all things related to personal finance since 2009.

Most investors see bonds as a safe place to put their money, but according to my guest this week, conventional wisdom may be deceiving.

Ed Rempel is a popular blogger, fee-only financial planner, and tax accountant, who wants to help you achieve financial freedom. Ed has spent the past 27 years helping thousands of Canadians become financially secure, and he joins us this week to explain why investing in bonds can actually put your portfolio at risk.

To help us understand the risks of long-term bond investing, Ed walks us through a couple of scenarios using the 4% rule. This tried and true concept of retirement planning says that when you retire, you should be able to draw 4% from your investments every year and have your savings last for the remainder of your life.

Ed has tested this rule with different asset allocations, and while it largely holds up for portfolios with equity holdings of 70% or greater, the chances of success drop dramatically as bond exposure rises.

This is not to say that bonds are never a suitable option. In fact, there are many investors that due to a low risk tolerance or investment time horizon, should have some bond exposure. But know that if you do, you are sacrificing returns over the long-term.

This episode of The MapleMoney Show is brought to you by Willful: Online Wills Made Easy. Willful’s intuitive online platform means you can create your legal will and Power of Attorney documents from the comfort of home in less than 20 minutes and for a fraction of the price of visiting a lawyer.

As an online entrepreneur, I’m constantly on the lookout for tools like Willful that can help me save time and money. Get started for free at Willful and use promo code MAPLEMONEY to save 15%.

Episode Summary

  • How bond investments work
  • The case against bonds as a low risk investment
  • Between 1940 and 1980, bonds lost half of their purchasing power
  • If you can’t tolerate short term portfolio losses, you should consider bonds
  • How does the 4% rule worth with bonds?
  • Over the long term, the stock market is easier to predict than the bond market
  • As a general rule, the less bonds you have the better off you’ll be
Read transcript

Most investors see bonds as a safe place to put their money. But according to my guest this week, conventional wisdom may be deceiving. Ed Rempel is a popular blogger, financial planner and tax accountant who wants to help you achieve financial freedom. Ed has spent the past 27 years helping thousands of Canadians become financially secure. He joins us this week to explain why investing in bonds can actually put your portfolio at risk.

Welcome to the Maple Money Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. Did you know that 57 percent of Canadian adults don’t have a will? Willful has made it more affordable, convenient and easy for Canadians to create a legal will and power of attorney documents online from the comfort of home. In less than 20 minutes and for a fraction of the price of visiting a lawyer, you can gain peace of mind knowing you put a plan in place to protect your children, pets and loved ones in the event of an emergency. Get started for free at and use the promo code Maple Money to save 15 percent. Now, let’s chat with Ed…

Tom: Hi Ed, welcome to The Maple Money Show.

Ed: Thanks for inviting me, Tom. Great to be here.

Tom: You’ve got a unique take on bonds that I wanted to run through today. Basically, there’s a lot of common advice out there where as part of a regular portfolio, you might do 20 to 25 percent bonds. Personally, I don’t have any bonds. And part of that felt a little bit like procrastination. I’m in my 40s so I should probably be looking at this, but maybe not. First of all, can you cover what the general theory about bonds is? What are bonds? And what are the common thoughts on them?

Ed: Bonds basically are paying a fixed interest rate. They’re mostly government bonds, but they could be corporate bonds. And they pay out a fixed interest rate. They could be short-term for one, two, three, five or 10 years. A lot of them are 30-year bonds. When you invest in them you get the going interest rate. But also, if interest rates rise, then your bond can go down in value. For example, if you have a bond today that pays one percent for the next 30 years and the going rate goes up to two percent, then your bond is not going to be worth the full-face value. It will go down in value. So the value of bonds goes in the opposite direction of what interest rates do.

Tom: If someone does want to get bonds, how do they do this? I remember when I was in school, I got a Canada savings bond. But that’s not what we’re talking about here, right? There’s bonds you can actually buy. I know through an ETF would be a good example.

Ed: Yes, you can buy them separately but most people buy them through an ETF or a bond fund. Or if you get a balanced or income fund or ETF, it’s got a portion of bonds within it.

Tom: A lot of the general advice is that you do keep a portion and it’s all about safety. Why do you think that’s not the case? What’s your case to make about the high risk of bonds?

Ed: Well, I think there’s a problem with the investment industry is in that it’s all short-term thinkers. They’re all worried about safety being about what if the market crashes next month or in the next year. It’s all about short-term fluctuation and that’s when all they’re worried about. So in my case, that’s different. I’m a financial planner, so I help clients achieve their long-term life goals. The biggest one is retirement. So usually it’s a 20, 30, or 40-year goal. We set a target rate of return that you need to get. It could be six, seven or eight percent a year. To have the retirement you want, let’s say you need to make eight percent a year. You’re not going to get that with bonds. The way I think about it with a plan for the long-term, the more bonds you have, the higher risk you have of failing to have the life you want. And with short-term investments—we all worry about the short term. But, with the stock market, based on its history, always does come back from a decline if you’re just patient and wait it out. It’s all about short-term risk versus long-term risk. Short-term risk is temporary and long-term risk is the one that really affects you.

Tom: When you talk about bonds losing money, a lot people think they can’t lose money with a bond. On paper, you can’t. But what you’re saying is that it’s inflation that causes that loss?

Ed: Well, you can lose money. If the rates go up in value, you can actually lose actual money. If you owned a bond and held it all in maturity, you’d get your dollars back plus interest. But if you’re in a fund, you could actually lose money in it because they’re not actually really holding it to maturity. There have been long periods of time, for example, in Canada from 1940 to 1980, bonds lost basically half their value after 40 years. When you think about it, 40 years is like your entire career of investing. Say in 1940 or 1950 you had enough money to buy two cars and you put it in bonds for 30 or 40 years. At the end of that time, you could only buy one car. You’ve lost half your purchasing power 30 or 40 years later. That’s what the investment industry thinks is safe. And to me, that’s risky, because if that happens with a big part of your portfolio, there’s no way you can retire the way you want with that. And actually, from 1900 to 1982, bonds in Canada and the U.S. basically just kept up with inflation. They made zero after inflation after 80 years.

Tom: You mentioned to 1982. Is 1982 when it went wildly up? I know a lot of people that are pro bonds will say, “Back in the 80s, I was making 20 percent.” Is that where some this bond love comes from?

Ed: Yes. If you draw a graph of the going interest rate back in 1950, it was something like two percent. Then it went all the way up to 20. And the peak was in 1982. Then from 1982 until now it’s down to one. So we’re back basically back to where we were in 1950. Well, we are slightly lower now, I guess. But yeah, there was this big peak in between. So the whole time it was rising, bonds are losing money, losing money. From 1982 until now, bonds have actually done quite well for 40 years because rates went from 20 to one. If you talk to any investment person, they’ll show you how this balanced fund done the last 10 or 20 years. But that’s entirely during the period I call the “bond bubble.” We had bonds collapse when rates were rising for 40 years. And then we had the “bond bubble” when the rates were falling for 40 years. And that 40 years is going to be nothing like the future because now we’re down to one. We can’t assume rates are going to keep going down, down, down. I don’t think that’s a good assumption.

Tom: Not much room to go.

Ed: No, it’s not. If you buy 30-year bonds now, the yield on a 30-year bond now is one percent. And inflation has been averaging two so that means you’ve lost 30 percent of your purchasing power, 30 years later. To me, that’s the optimistic view. If rates stay low where they are, you make nothing. They might make inflation or lose 30 percent. That’s the optimistic view. The pessimistic view is, what happens if rates rise somewhere in the next 30 years? That’s when you’re actually losing even more money. The way I look at it is this… Let’s say you had a coin. Heads you break even, tails you lose money. How many times do you want to flip that coin and how much of your portfolio would you want to be that coin?

Tom: Yeah, exactly. Compared to stocks, over the long run, they’re always going to come out ahead. It’s just that you have to wait out that long run and not look at year to year.

Ed: You’re right. It’s all about long-run versus short-run. If you’re the kind of the person that can’t tolerate when stocks fall 30 percent and take a year or two to bounce back, then you probably need some bonds, something just to steady the return and you’re going to get a lower, long-term rate of return because of it.

Tom: Beyond the emotional side, is there any case for bonds when someone’s younger? I honestly don’t even know what caused the spike in rates back in the early 80s, but could something like that happen again?

Ed: It was mostly inflation. They increase the interest rate on purpose because inflation had gotten out of control. It’s possible it could happen here because now we’re talking about big government debts and what happens if we start getting into inflation again. It’s not something that’s being predicted now, but it could easily happen down the road.

Tom: Yeah. Not to go way off track here, but I was actually just having this conversation with someone about the idea of universal basic income. If something like that came in, at first it would seem like people get more money. But I would assume that would actually lead to inflation in the end. If there’s more money around, the price of everything would go up in the future anyways.

Ed: Also, I don’t think the government can afford it. Basically, they’re going to fund most of it on borrowed money and they’re going to have to issue tons and tons of bonds. And what happens is, when investors who are buying bonds lose interest in buying them, the government has to start offering them at a higher and higher interest rates. Something like that could trigger higher inflation, higher interest rates and kill the bond funds even more.

Tom: Is there a certain time when people should look at moving into bonds? Say it’s someone that was retiring just before COVID. There needs to be some money available for that year. I still see the benefit of having a lot of money in equities, because if you’re retiring at 60 and planning to live to 90, you still have a long timeframe where you want your money to grow. Should people be putting some money into things like bonds for that short-term use come retirement?

Ed: I did a very detailed study on this. I have 150 years of data of actual stock market returns, bond returns and inflation. I looked at every 30-year period from 1870 onward. Let’s say you retired in 1870 and you were retired for 30 years. Were you able to do it? How what does your retirement look? There is a rule called the 4-percent rule that financial planners use which means, when you retire, you can take 4-percent of your investments out a year, increase it by inflation and it should last for the rest of your life. So if you had $1 million, 4-percent would be $40,000. So you’d take $40,000 for year one. In year two, you increase it by inflation and it should last for 30 years. When I tested with actual data, what I found was that it did work 96 to 97 percent of the time if you had between 70 and 100 percent of stocks. But if you had a balanced portfolio, it worked less. And if you do like most seniors and use the age rule where they say they’re 80 years old so they should be 80 percent in bonds—if you use that kind of rule throughout your retirement, it actually works only about 40 percent of the time. Sixty percent of people that use the 4-percent rule actually lost money. The basic thing is, anytime you have a long-term time horizon and the ability to tolerate the ups and downs, then you don’t really need bonds for anything. With 50 percent of couples today, one of them will make it to 94 so it’s a 30-year time horizon. If you’re looking at money for next year or the year after, not just the regular income but something that’s short-term, then you need to have bonds. And if can’t tolerate the short-term fluctuations, then you need to have bonds as well. I think a lot of seniors probably can’t tolerate these fluctuations so they would need to have a portion of bonds just to smooth it out.

Tom: But I could see that being where I would be more concerned. It’s easy nowadays when you look at the numbers and say, “Well, no, I’m just all equities and moving forward towards retirement.” But in that example where you just retired and now you’re on the withdrawal side of it, even temporarily, your stocks are suddenly half their value. I could see where emotions would start to play into that. Yes, everything’s returned for now, again. But at least for a brief moment, I could see emotions kicking in.

Ed: The thing about that, Tom, is that risk tolerance is a learned skill. You can learn to tolerate the risk. You need to do some research on it, understand what stocks do. There’s a process you can learn. It’s like when I first went flying. I was terrified of flying it first. And every time the plane had some turbulence, I was grabbing my seat wondering what was going to happen. And after talking to a lot of people I realized planes just do that. It’s just part of flying and nothing to worry about. So, I used to have a low turbulence tolerance and now I have a high turbulence tolerance. It’s the same thing with stocks. The turbulence is just part of what stocks do but it’s worth it because with flying I get there way faster than I would in a car. It’s the same thing with stocks. Over the long-term, you’re almost definitely going to make way more money than with bonds or other investments but you have to be able to tolerate that. And it’s something you can learn.

Tom: I know everybody’s different. But just in general terms, are you recommending no bonds until they get to retirement when they want to start looking into protecting some of that through bonds?

Ed: Well, interestingly, most of our clients are 100 percent equities through their whole career and all the way through retirement. They never have bonds in their life. But our clients, I don’t think are representative of the public. You still have to know your risk tolerance. While risk tolerance is a learned skill, if you haven’t learned it, you need to have some bonds. You need it for short-term money. I think most people need to have some bonds but you could learn to tolerate it if you don’t need it. And, if you don’t have bonds, there is a huge difference in the long-term returns you can get.

Tom: But you did say when you when you studied it, the 30 percent bonds actually did okay?

Ed: Yes. That’s using the 4-percent rule over 30 years.

Tom: Is that just in general? Is that what you would recommend in retirement or does it really just depend on the person?

Ed: It depends entirely on the person. In general, the higher amount of stocks you can tolerate, the better long-term.

Tom: So I’m still wrapping my head around this. Like I said, I don’t have any bonds now. But come retirement, I think I would want that because it’s easy to say I have a high-risk tolerance now where every down market actually just looks like a buying opportunity to me. But come retirement, I wouldn’t see it as a buying opportunity. I’d see my portfolio which has no new money going into it has this this risk of being cut in half. Obviously, making sure you’re well diversified in stocks, you truly don’t think we need bonds at all in that case?

Ed: If you’ve got a solid stock portfolio diversified globally—Canada is not a properly diversified index so you want to be outside of Canada. I think people think stocks are riskier than they seem. For example, the worst calendar, 25-year return on the S&P 500 in the last 90 years (including the Great Depression) was 7.9 percent a year. That’s the worst return. Stocks, long-term, are quite reliable. In fact, there’s the classic book I think is really worth reading. It’s Jeremy Siegel’s book, Stocks for the Long-Run. He took stocks and bonds after inflation and compared them. Usually, with standard deviation, there’s a measure of risk. It’s actually a measure of uncertainty, basically, but it’s still a measure of risk. And the investment is refocuses on the three-year standard deviation. But what you see from his study is that risk is entirely time-based. Stocks are riskier than bonds for one-year, two-year, three-year, five-year periods. But when you get to 20 years and longer, stocks actually have a lower standard deviation, as they’re more predictable. It’s easier to predict where the stock market will be after inflation 20 years from now than to predict where the bond market will be. Now, that’s something again. You’ve got to get educated. You’ve got to learn. You probably need to work with an adviser that’s going to hold your hand when things get bad. The point is, technically, if you look at a purely, the less bonds you have, the better off you will be for any long period of time. But you still have to know your risk level, your tolerance and stay within it.

Tom: Can you just run us through all your points? I know you have a few reasons why you consider them too high risk. Feel free to just work through them with us here.

Ed: The biggest thing is my definition of risk. My definition of risk is not fluctuation of the market. My definition is, we set 6-percent as the rate of return (or 8-percent—whatever is in your plan). I’m less worried about ups and downs as long as I’m confident that we’re going to get that 6 or 8 percent a year, long-term you’ll get the retirement you want. It’s a long-term definition of risk versus the short-term definition of risk.

Tom: I like that idea that risk is about risk to the finish line, that goal.

Ed: Yes, it’s a long-term risk and that’s the risk that affects your life. I actually have a graph on an article I just posted on the weekend showing short-term risks versus long-term risk. Stocks are experience 30 percent drops but they go up over time. And bonds can have 40 years where they go down, down, down, down, down, to where you’re down 50 percent after inflation. Which one do you think is riskier?

Tom: And inflation is something people need to keep in mind. Obviously, with bonds, it sounds like it’s pretty much everything. But even with equities, if says they want a million dollars by the time they retire, what’s that going to actually be worth 30 or 40 years from now? It’s going to be different.

Ed: Back in the early 80s, when inflation was 12 percent a year it was a big thing. People saw it from year to year. Now, inflation is two percent. From one year to the next you barely notice anything. But again, over 25 years, the inflation rate and the cost of living doubles. So inflation in the short-term isn’t really a factor, but long-term it’s a big factor. And now banks are trying to keep inflation around two percent. That’s basically where it’s been the last 30 years. But if your bond yields are lower than two, that means that you can’t even buy as much with it next year as you did this year.

Tom: Another way to think of it for a lot of people would be you’d literally be better off just holding onto that money in cash basically, right? Because you’re not gaining anything.

Ed: You know, I think that’s actually better because with bonds you can delude yourself that it’s actually invested. I think what actually might make your head more clearly understand it is, you invest the portion that you can in equities and you put the rest into a high-yield savings account. Now, today, you can probably make more—higher from EQ Bank than you can from a 30-year Canada bond. And also, it’s not going to go down in value if interest rates go up. That makes it actually clearer in your head. You know the money isn’t really savings. You’re not going to make anything on it other than the interest rate. But if you look at those as being your growth portfolio and your bond portion as it not being a savings account, I think that’s a more beneficial way to do it.

Tom: Yeah, where it where a dollar is still a dollar.

Ed: Yes, and you don’t delude yourself into thinking it is invested. It’s kind of parked in this low rate of return. But, instead of investing in bonds, you just don’t invest the portion that you would have put in bonds.

Tom: Go through any other points you had about why they’re high risk.

Ed: Actually, they used to call them risk free return but Warren Buffett’s great quote recently called bonds “return-free risk.” It’s return free risk is return free risk because right now because, basically, heads you make zero. If rates stay flat you make nothing. And if rates go up, you lose money. But also, I think there’s an entire misperception for people about fixed income. People tend to think fixed income is safe and equities are risky and it’s way more complex than that. When I see people lose 90 or 100 percent of their money, it’s almost always a fixed income investment. We’ve had some huge losses. There have been some huge losses on not only after inflation. For example, the crash we had in 2008 was a financial crisis, but it was mostly actually related to a bond like instrument. It was the mortgage backed securities. They had these mortgage backed securities which are kind of like bonds that pay a little bit higher interest rate. And people were deluded into thinking since they were fixed income they were safe and they weren’t. They collapsed. In Canada we had income trusts back in 2006. People were in income trusts because they were paying a good, fixed return that wasn’t addressed. But it turns out that was a problem. The rules changed and they collapsed. I think people will buy private mortgages, second mortgages. But in reality, they’re almost unsecured. If you take a second mortgage, you can get one sometimes when someone’s paying you 10 percent. But this is someone who wouldn’t qualify from a bank. And if they don’t pay you, you have to buy out the first mortgage to buy them out. So, if they don’t pay you, you just kind of have to wait and hope to get paid when they sell the property. Then you can buy syndicated mortgages but lots of people have lost money on those. There is a website called, Victims of Syndicated Mortgage Investments; It’s people who bought something because they thought it was fixed income and therefore it was safe and they basically lost all their money. It’s the same thing with mixed mortgages. That’s from corporations. There’s been lots of them in the last 10 years that have gone bankrupt. I think people, as soon as they see fixed income, they think it’s safe but a lot of times it’s not. And that’s where you can lose a 100 percent of your money. Meanwhile, with stocks you’re investing in companies and they go up and down. Individual companies go bankrupt, but the market overall, has reliably gone up long-term in the past. And the reason is because you’re investing in big, solid companies that have managements. So whatever happens in the market, the managements of companies adjust. I used to work for a private company and that’s what happened. We had a recession. Profits were down. At all of these management meetings, people were asking, “What are we going to do? Do we lay people off or cut costs or come up with a new product, buy another company or restructure our debt…” Somehow they’ve got to get the profits back up. And that’s the reason why the stock market tends to bounce back. Bonds that are already fixed income doesn’t have a management so if things are not going bad they can just go from bad to worse. Nothing stops them.

Tom: You mentioned Warren Buffett. I’ve always liked how he looks at stocks and companies. It’s just these simple things. You understand what you can you invest in. I get that too. I understand how a business works. And like you said, how do you make money even when times are bad? Half the fixed income things you just mentioned, I’ve never even heard of them and I don’t understand how they work. There’s a lot of very complicated things within fixed incomes that just sound like a lot of financial games.

Ed: That’s exactly how I look at it. It’s just a bunch of games. None of them make as much as stocks, as reliably as stocks over the long-term. Plus, they’re not taxed favorably. And while people think of them as safer, I think of them as riskier.

Tom: I think my biggest issue would be that lack of understanding of how they even work. That just seems like you’re handing your money off to someone with some hope that it’s going to turn out.

Ed: Yes, they think since it’s fixed income, it’s safe, but they don’t bother to understand what the actual risk is. They can blow up.

Tom: Were there any other points?

Ed: I just wrote an article I posted this past weekend called, How to Easily Outperform Investment Advisors, Robo Advisors and even couch potato portfolios. All of it is just by basically not having fixed income. Also not having Canada or getting into trendy things. I call the investment industry the FBI. It’s all about “forced bond investing.” You go to any investment adviser or even a robo advisor, they’re constantly trying to force you to buy bonds. I had a guy that was interesting. He was around 30, was an engineer. He knew all about investments and he had a high-risk tolerance. He’d been to three different robo advisors and every single time there had to be bonds of the portfolio. He actually called them up. He actually knew how to game the risk tolerance questionnaire so it came off the most aggressive possible. And they still recommended 20 percent bonds. So he phoned them and said, “I don’t want any bonds. What do I have to do?” And they said, “We’ll make an exception just in your case, 10 percent bonds.” But they said there had to be bonds. He called me up saying, “How come they’re forcing me to buy bonds? I don’t want bonds. I have 50 years in front of me. I want this growth.” For the investment industry it’s all about compliance. The adviser is more worried about their compliance person than about what’s right for you. Whatever they recommend has to fit the compliance rules, whether or not that’s right for you. They are all trying to force you to buy bonds but you have to think about what’s right for you. And, if you really are a long-term investor and can tolerate the ups and downs, you don’t need any bonds at all.

Tom: With the pension at my workplace, the most aggressive option is still 25 percent bonds. And this was an option to me when I was in my early 20s so that was the most aggressive I could go. I’ve seen that firsthand where, even back then, with very little financial knowledge, I still knew that was a lot weaker than I wanted. Maybe part of it was being young. I just wanted to be aggressive. I wanted as much gains as possible and it wasn’t even an option.

Ed: Yes, and when you started out there was probably hardly any money in there so you could have gone down and it wouldn’t have really bothered you. But they still forced you to have 25 percent bonds. I call it, compliance advice. It’s about protecting the company. They don’t want you to complain. But they’re all forcing you to buy bonds.

Tom: Another point you brought up was about being diversified across the world. We had Noah Solomon on the show pointing out that the usual couch potato portfolio doesn’t make any sense there either where it’s 25 or 33 percent Canadian equities. Why, when it’s only about three percent of the worldwide equities? So I like that you mentioned that Canada isn’t where it’s at when it comes to being fully diversified.

Ed: What’s more, the support teams in different industry sectors of the stock market, in Canada, 75 percent of our market is just three of them. And with 10 of the other 11, there’s only one or two percent in there. To me, is the TSX 6-year Canadian index should not even be a core holding for anybody. It’s a resource and financial sector fund. It’s not a core holding. You go globally and they’re much, much more diversified with bigger companies. In Canada, only 14 percent of the number of our stocks are considered large by global standards. The average company in our index is smaller than the average company in the emerging markets index. We’re a mid-cap resource and financial sector fund. And in the last 10 years the Canadian stock market has underperformed the global market by 6 percent a year and the U.S. by about 8 or 10 percent a year. We did well back in the 2000s when oil was at $150 a barrel. But now it’s down to $20. While we’re in an age of climate change and all this, the oil industry is still the main driver of our dollar. Our stock market tends to do well when oil is high or not one that’s low. I think it’s very easy to outperform any of these advisors, robo advisor and couch potatoes. Just don’t have fixed income or Canada. Just invest entirely globally. With all global equities, you beat them by a lot. I have a chart that shows the difference. We beat them all in the last decade by 4 to 6 percent a year. It’s quite easy to beat those if you don’t have those things dragging down your performance.

Tom: Were there any other points you had? I want to make sure we cover everything.

Ed: I’ve tried to create a new term that’s not caught on yet. But maybe it’s sort of catching on. Let’s say you have some bonds and it’s going to be a somewhat lower return. How much lower should you reasonably expect? So I made up something I called the AALR, which is the asset allocation loss ratio. There is the MER. We understand MER are the costs associated with running investment. So, if you have a 2 percent MER, it’s going to reduce your rate of return by 2 percent. While asset allocation loss ratio is because your bonds in there, you should expect a lower long-term rate of return. I think people are used to thinking in MER terms but not in the asset allocation terms. My formula is 25 percent bonds (which equals a one and a half percent MER)… So the 75, 25, portfolio is the same thing as having a 1.5 percent higher MER in your portfolio. I’ve seen people that leave a high-fee adviser that’s not giving too much good advice and go to a robo advisor, then they end up with higher amount of bonds and actually don’t make any more money because the robo advisor has a higher amount of bonds they had otherwise. If you’re going to have some bonds—and some people may need it because they can’t tolerate the risk bubble. But this way, it helps you understand how much it is affecting your long-term return.

Tom: Yeah. Exactly. I like that you broke it down that way because as someone that was into mutual funds early on that had high MERs, I was happy to reduce them into index funds at the time and ETFs now, I do look at a lot of things as MERs. And thankfully, I’m not in bonds right now other than my pension which I tend to ignore. But it’s still something to think about. You may have changed my mind a bit on what this looks like in retirement. I understood the idea that you wouldn’t want to go too heavily into bonds because there’s still a long-term benefit to stocks even in retirement. I got that. But I always figured I would want to start moving into bonds earlier, in my 40s even.

Ed: In the last five years before death is maybe when you need some.

Tom: Well, if you can tell me when I’m going to die, I’ll plan that out.

Ed: That’s the flaw in that. As long as you’re investing for the long-term, it’s hard to adjust because you know you’re going to make quite a bit less. You know how I got into this, Tom? It’s what actually kind of opened my eyes. This was years ago when I got into financial planning and was writing financial plans for people. I’ll give you a typical example. Let’s say you’ve got a couple that make $100,000 together, $50,000 each. They want to on 75 percent of that which is $75,000 a year. And let’s say they’re 35 years old now and want to retire at 65, 30 years from now. That’s a really typical situation. Government pensions give them maybe $25,000. So they’ve got to get $50,000 a year in today’s dollars— $50,000 a year out of their investments. So you look at how much they need to do. Let’s say they have a balanced portfolio with half bonds, half stocks. They should probably expect maybe a 5 percent rate of return, long-term. To get to $50,000, it’s grown in 30 years. It’s over double with inflation. To be able to get that, they need $3.18 million at 5 percent and they would have to invest $47,000 a year. They’re making $100,000 before tax. To get the $75,000 when they retire they have to invest almost half of their gross pay for the next 30 years to get it if it’s a balanced fund. But let’s say they’re all equities and we go with 8 percent. That’s a somewhat conservative expectation for equities. Now, the same couple is investing 100 percent equities. Now they only need $2.15 million because their investments are going to have a higher rate of return. And they have to invest $18,000 a year, which is just their RSP route. So for 30 years, if you’re all equities, you just max your RSP room and you have a comfortable retirement. However, if you want to match it with a balanced portfolio, you have to invest basically half of your gross pay. It’s writing financial plans and maybe realize, “Oh, my God. We really have to find ways to get higher equities because nobody can actually reach their goal with these balanced portfolios.”

Tom: And just to make it clear for anyone, you’re saying gross pay, which means by the time you take taxes out and everything the math doesn’t even work, really.

Ed: You make $100,000 gross, you bring home $70,000 and now someone says you have to invest $47,000 out of the $70,000. That only leaves you $23,000 and you haven’t even paid for your house yet. The math just doesn’t work. That’s what I find, the vast majority of Canadians use conventional asset allocation of 60-40 bonds and stocks. And therefore, they’re going to take a big cut in their lifestyle when they retire. There’s no way they can get close to their pre-retirement income with a rate of return so low.

Tom: This has been great running us through this because I think it might change a lot of minds on how bonds actually affect their overall investment strategy. We’ll make sure to include a few of these articles you mentioned in our show notes because I think there’s a lot of further reading for people to dig into here. Can you let people know where they can find you online?

Ed: Yes. My blog is just It’s also called unconventional wisdom. So it’s because we’re in Canada. You’ll find the articles in either of those. There is this high risk of bonds which is an article I wrote a few months ago. And the most recent article on how to easily beat investment advisors and robo advisors mentions quite a bit about it all, as well.

Tom: That’s perfect. We’ll make sure to include both in the show notes so people can go dig into this. I think a lot of it will make more sense when they see those graphs you have that I saw on the high risk of bonds post, to fully see the long-term effects. Well, thanks for being on the show.

Ed: Yes. Thanks for having me, Tom. It’s been a blast.

Thanks, Ed, for explaining the risks of bond investing. While bonds remain suitable for some investors, history shows that they’ve always underperformed the stock market by a substantial margin over the long-term. Of course, the current rate environment isn’t helping matters either. You can find the show notes for this episode at Are you a member of the Maple Money Show Facebook community? If not, I’d love to connect with you there. It’s a great place to ask a question or share a recent money win encourage others. To join, head over to to share with the group. I look forward to seeing you back here next week when we’ll have Lauren Haw here to discuss the home buying process.

There’s a problem with the investment industry in that it’s all short term thinkers...when you think long term, the way I think about it with a plan, the more bonds you have, the higher risk you have of failing to have the life you want. - Ed Rempel Click to Tweet