Surviving a bear market

In 1982, one of the best investments you could have made would have been a long-term Government of Canada bond. Aside from the security of owning a fund comprised of investments guaranteed by the Canadian government, you would have benefited from long-term bond yields north of 17 per cent.

In 1982, one of the best investments you could have made would have been a long-term Government of Canada bond. Aside from the security of owning a fund comprised of investments guaranteed by the Canadian government, you would have benefited from long-term bond yields north of 17 per cent. 

These were, of course, historically high yields — the likes of which were unprecedented and haven’t been seen since. 

While there are a number of theories, most attribute the incredible rally in financial markets that began in the early ‘80s to the death of disco.

Had you invested $50,000 in this mutual fund, reinvested the distributions, and held it, you would likely be sitting on over $1 million today. 

If only my dad had listened to me!

Keep in mind that you would have had to pay annual taxes along the way. 

Is the same opportunity there today? Probably not. 

Many believe that the multi-year bull market for Canadian bonds is over. Many feel that interest rates in the near term are more likely to rise than to fall. And if that is the case, Canadian bond funds will struggle. 

Are there alternatives? 

One effective way of managing the fixed income component of your portfolio is through a laddered bond portfolio. For example, invest 20 per cent in a bond that matures in one year, 20 per cent in a two-year, and so on up to five years (or more). Each year, as a bond matures, buy a new five-year bond.

If interest rates continue to rise, you will have the benefit of being able to reinvest at a higher rate annually. If interest rates fall, your longer term bonds will become more valuable, as they will be earning a better return than what is available in the open market.

A laddered bond portfolio can also be customized to match your income and liquidity requirements. A bond portfolio can be set up to provide income on a regular basis. A laddered bond portfolio also provides access to lump sums annually as individual bonds mature.

Most importantly, laddering your bond portfolio reduces risk. By customizing a bond portfolio to your specific needs, you reduce the risk that a bond would need to be sold prior to maturity, which can result in a loss.

For more on fixed income investing, please feel free to call or e-mail.

To receive PDF versions of this or previous articles please e-mail jim.grant@raymondjames.ca.

 

Jim Grant, CFP (Certified Financial Planner) is an Financial Advisor with Raymond James Ltd (RJL). The views of the author do not necessarily reflect those of RJL. This article is for information only. Raymond James Ltd., member CIPF. For more information feel free to call Jim at 752-8184, or e-mail at jim.grant@raymondjames.ca. and/or visit www.raymondjames.ca.

 

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