InvestorNewb wrote:The reason I want to hold US bonds is because most of the income that my business generates is with the US, even though I am Canadian.
My savings are therefore mostly in USD. Are you suggesting that it would be better to convert the bond portion of my portfolio to CAD?
If your currency of liability (where you pay rent, mortgage, food, healthcare, education etc.) is different from currency of income then you have a fundamental mismatch-- you are at risk.
You can build up assets in your currency of liability to offset this (somewhat). If you plan to retire in Canada, then that is CAD.
The 'hedge' against USD rises CAD falls is actually to *borrow* in the USA-- but there's all kinds of issues in that (tax, volatility etc.). Companies that have large operations in the USA for example (that are not US cos.) usually borrow against those assets.
- hold your bonds in CAD (assuming you are not planning to retire somewhere else) - RRBs are the perfect asset, the yields are so low right now straight bonds up to 10 years maturity is more appropriate (gotta be in your RRSP or other tax saving fund-- otherwise you are getting a negative after tax real rate)-- a range up to 10 years I should say, not all in 10 year bonds (unless you can hold to maturity ie not a fund). You don't really want an average duration more than about 5 years
- diversify your equities 100% globally, which would be about 4.5% in Canada, about 50% in USA-- that's enough diversification. You want to get the Emerging Market/ Developed market split right. I am vague on fund weightings (the two main index providers, FTSE and MSCI have different definitions/ weightings of Emerging Markets) but my mental sense (to be checked!) is EM are c. 15-20% of developed markets. Either you find a fund that does that for you (holds both) OR you hold c. 10-20% in EM (I'd be more comfortable around 10% than around 20%, for shading-- '50 Shades of Eh?'
You could argue you should not hold USD assets given one of your major assets (your income) is in USD. That is extreme in my view. Global diversification is best-- the US market has been a decent performer the last few years (stripping out currency effects). Note the US economy is definitely recovering, and higher interest rates (which will hit bonds) are in prospect, although probably not until 2014-- the market will move *before* that happens, though.
On a 60/40 equity/bond split you would then be c. 43% in CAD assets (40% bonds + 5% of 60% equities).
Remember Canada is the place where Nortel became more than 20% of the index- -it's not a diversified equity index (mostly banks and resource companies).
Once your target asset allocation gets to be more than about 60% bonds then there is an issue-- starting to have too many eggs in the CAD basket (I am assuming you will qualify for Canada Pension Plan? Any other Canadian pensions? Own your own home?). Once you get to 60-70% in bonds then you need to start to think about diversifying away from CAD (one good diversification is simply to hold lots of Real Return Bonds-- protection against Canadian CPI).
Note Canadian property is another CAD asset, along with CPP eligibility, and that would imply tilting even further away from CAD. Not an easy question but you could count your *equity* in your home as part of your asset allocation for purposes of currency diversification.
Tax matters a lot in this. You have to make sure you are in the right places to get the tax credits, maxxing RRSP and other means of deferring tax, etc.
The Financial Webring has good discussion and advice on these matters by Canadians.