@Jeremy: I’d say that there is no “one size fits all” bond allocation. Government vs corporate involve defaults (corporate) in addition to interest rate risk. Short-term bonds mitigate the impact of rate fluctuations (compared to longer term bonds) but do not hedge completely. TIPS and Real Return Bonds (RRBs) are the same product with different names: US = TIPS; Canada = RRBs. I think the allocation depends on your risk tolerance, which should be based on attributes such as age, financial position (ability to face principal loss), investment knowledge, investor type (conservative/enterprising; it may take an enterprising one to buy junk bonds), etc.

One is shorter term and the other for longer term. Depends what you are looking for.

I love ladders. The Claymore Corporate bond ladder offers what I’m looking for. Potential for growth, regular income and is for the long term (well for me anyways).

Short term bonds offer more flexibility. Their upswings and downswings are USUALLY not as severe.

Just to give you an idea. At the stage in my life, most of my retirement funds are in Growth. I do have a GIC and a bond ladder (I started selling my bond ladder and purchasing the Claymore Corporate Bond Ladder ETF). I only reinvest the capital. The interest, I put in a short term bond MF. When something like ‘08 came along, I had enough cash to purchase a stock that I was looking at. It was trading at $20/share, but dipped to $13/share. Sell high, buy low. I used short term bond because it pays way more then a Money Market, moves slowly and offers flexibility.

Both are part of a portfolio, when you know what to do.

@ JFG: Thanks for the insight. I’ve been looking at corporate bond ETFs but do you think there is enough upside to them when compared to a short-term bond ETF like XSB that offers better diversification?

Holders of Government of Canada bonds receive a promise of regular interest payments and repayment of principal at maturity, but no rights to a claim on the underlying. Canada Savings Bonds are technically debentures, but they represent the highest domestic credit quality and are classified as bonds for investment purposes.

I have started to sell my bond ladder (inside my RRSP) and buying ETF’s. Corporate for now, due to higher possible return and I’m still at least 15 years from retirement.

Ha ha! I agree with the bond fund! There’s just no fun in analyzing bonds, but you never know… I have a bond index as well. Bonds don’t have the same upside as stocks! :D

Most of my portfolio is indexed but i would like to start researching individual securities, just for fun and maybe some profit!

you don’t get any interest payment

should have been

you don’t get any inflation adjustment payment

You’re absolutely right that the normal interest payments are paid out on schedule.

@Mike: Municipal bonds exist in Canada but they are few and are mainly for capital investments than operational purposes. Even those few bonds are guaranteed by the provinces and hence, essentially provincial bonds. You are right that municipal bonds are not tax-free in Canada. Sometime back, there was a bill in the Senate proposing tax-free municipal bonds but I do not know about the progress on that. Since you like reading about bonds, here’s a related paper (just 2.5 pages) on municipal bonds :)

http://www.suma.org/…/Discussion%20Paper%20-%20Municipal%20Bonds.pdf

I accept that I got it wrong wrt the RRBs. For my example, after 6 months, the inflation-adjusted principal would be $102 and the interest would be $1.53. For the second 6-month period, the principal would be $103 and the interest would be $1.55. Thanks for spotting it! But, you should note that interest is paid out in addition to the inflation-adjusted principal at maturity.

If the author is Canadian, why in the world is he saying this??