Q. I understand that to have a properly balanced account around half of our investments should be in fixed income products. However, most bonds have a ridiculously low return. GICs are an option, as are high interest savings accounts. Are there better solutions?

I know it’s difficult to hold on to low paying fixed income products when the stock market is riding high and producing double digit returns. Every dollar in fixed income comes at a price of reducing your expected returns. Does it still have a role to play in your portfolio? Yes, indeed it does. Fixed income lowers risk, and provides stability, diversification, and a degree of protection when equity markets fall.

Take a look at this chart showing how the stock market plunged in 2008.

The Big Picture Investing Chart

Click for link to full chart

The S&P/ TSX Composite Total Return Index dropped 43%. However, a balanced portfolio of 50% fixed income and 50% equities dropped 20%. Still sizeable, but much easier to stomach.

Related: An investing guide for beginners

That being said, how do you glean a bit more return from your fixed income investments?

GICs

GICs are safe. They are backed by the Canadian Deposit Insurance Corporation up to $100,000 (Credit Unions guarantee deposits from $100,000 to unlimited, depending on the province through their Credit Union Deposit Insurance Corporations.)

Another advantage of GICs is their stable prices – they don’t fluctuate like bonds and bond mutual funds and ETFs.

Disadvantages are their illiquidity and locked in interest rates (should interest rates start to rise). A 5-year ladder, where one GIC matures each year and is reinvested, is a good solution.

Related: Five-year GIC ladder vs. One-year rolling terms

Pick higher yielding GICs offered by small institutions and credit unions. You can compare GIC interest rates here.

Bonds

You can enhance yields with not much more risk by buying bonds issued by blue-chip corporations rather than governments. Individual bonds also provide capital preservation if kept to maturity. With interest rates so low you need to be stingy with any fees you pay. For low cost and more diversity choose bond index funds, or an ETF such as iShares Canadian Corporate Bond Index ETF (XCB).

Preferred Shares

You could also consider preferred shares. Their biggest benefit in a non-registered account is the tax advantage of dividend income as opposed to the interest paid by corporate bonds. Because these are riskier than bonds, limit your allocation to not more than 10 – 20%. ETF options include BMO S&P/TSX Laddered Preferred Shares ETF (ZPR) and iShares S&P/TSX Canadian Preferred Share Index ETF (CPD).

Remember, as you move through these options you’ll be taking on more risk.


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