From The Boomer & Echo Mailbag: The Role Of Fixed Income In A Portfolio
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.
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.
What do I do with my “house” money (450k) while posted overseas for 3 years? HISA at banks are a joke, best I can find is EQ at2% (but has a limit of 100k in an account). GICs are even worse, Govt TBs not much better…
Financial ads in Globe and Mail offering 8-12% interest on questionable guaranteed investments, REITs offering 8% returns, but this is our house money, can’t afford to gamble with it.
Hi MJ, I’m certainly no expert but would suggest setting up five different HISA’s at the top five institutions that only have $100k CDIC protection. Or as listed above find a credit union with unlimited deposit insurance with the highest interest rate. The first option would obviously be much more admin work to setup but could possibly average a higher overall interest rate as opposed to going with the second option. If you do find a credit union in Canada with unlimited deposit protection that has a competitive rate to EQ (around 2%) please let me know as I am curious myself of this option!
Yes, we all want to preserve all of our principal while reaping double digit returns 🙂
However, the main issue here is short term safety. There is no good combination of deposit guarantee and higher rates.
Individual short term bonds (< 5 years pay well under 2%).
As far as I can determine, EQ is the only FI that pays 2% interest ($100K CDIC ins.) All others are quite a bit less.
Street Capital Bank has GICs that pay 2% plus if you can lock in for 2 years or more (5 year rate 2.55%).
Oaken Financial offers slightly less interest rate (5 year rate 2.25%)
Only Alberta and BC Credit Unions guarantee all deposits.
You may want to look at Northern Credit Union. They currently have a form of GIC that offers 2.25% for a one year term which is financially backed to $100,000.00.
I think that the credit unions in Manitoba also guarantee all deposits, e.g. Achieva and Hubert.
What Peter says about Manitoba credit unions is true but there is a catch. Until a number of years ago, the Manitoba government was willing to back-stop the no-limit guarantee offered by the credit unions. That is until a few credit unions got into trouble. Unlike some other provinces the Manitoba government no longer provides this guarantee.