Q. With the financial mess that a lot of countries are in (or about to be in) these days I wonder how the experts feel about bonds being a safe investment. Johnson & Johnson, for example, has a better credit rating than the U.S. government. Are bonds still safer than stocks? Gary D.
To retirees, receiving investment income is a prime objective. With the current higher prices of blue chip stocks it’s becoming increasingly difficult to get a decent yield. Bonds have always been a key part of an income-oriented portfolio.
Are Bonds Safe?
The face value of government bonds will always be safe because governments have the power of taxation and they can print more money. Corporate bonds pay a little more because they don’t have that power – so they are inherently riskier – but choosing high-grade bonds (BBB and higher) can reduce that risk.
What is the Risk?
The main risk of bonds is interest rate risk and it’s close cousin, inflation risk. As interest rates increase, a bond portfolio will drop in value. If you need to sell before maturity you may lose money.
You can only be sure you’ll get back the face value of a bond if you don’t buy at a premium and you keep the bond until maturity – then price fluctuations won’t matter.
Related: What Are Real Return Bonds?
Most bonds these days are trading at a premium resulting in a capital loss if held to maturity and a reduction in yield. These losses can only be used to offset capital gains.
- A Government of Canada bond purchased on the secondary market maturing June 1, 2015 with a coupon rate of 11.25% has a purchase price of 121.81 ($10,000 bond will cost you $12,181) and the yield is a measly 1.00%
Inflation erodes the purchasing value of fixed income payments – the longer the term, the higher the inflation risk.
Today’s interest rates really have nowhere to go but up – but when? Experts have been predicting interest rate increases for several years now and the Bank of Canada is staying firm.
- A new issue (April 1/2013) Government of Canada 10 year bond has a coupon rate of 1.5%
You can stick to short to medium terms for a steady income. But since long-term bonds normally (not always) will have a higher coupon rate it may make more sense to ladder your bonds to help reduce the impact of changing interest rates.
- GofC 1 to 3 year bonds have an average yield of 1.01%
- GofC 3 to 5 year bonds have an average yield of 1.2 to 1.24%
- GofC 10 year plus bonds have an average yield of 2.33 to 2.38%
- Corporate 10 year plus bonds have an average yield of 3 to 5+%
If you don’t have the funds or the expertise to build a decent bond portfolio, bond ETFs are a good, low cost, professionally managed alternative.
- iShares DEX Universe Bond Index (XBB) has a weighted average coupon rate of 3.92% and a 12 month yield of 3.22%
- iShares DEX All Corporate Bond (XCB) has an average coupon rate of 4.51% and a rolling 12 month yield of 3.78%
- iShares US Corporate Index Fund has a weighted average coupon of 4.98% and a yield of 3.3%
Conclusion
Bonds can provide a worry-free stream of income. For higher coupon rates buy high quality corporate bonds (or ETFs) and diversify by company, sector and geography.
Related: Canadian Monthly Income Fund Comparison
Now, I’m in no way an expert and these are just my opinions.
What’s your take? Are bonds a safe investment today?
Nearly half of Canadians are living paycheque to paycheque. A recent survey by the Canadian Payroll Association found 47% saying they would face financial hardship if their pay was delayed as little as one week.
Living Paycheque To Paycheque
One of the easiest ways to save money is on your bank fees, but it can be tough to change your banking routine when you’re living paycheque to paycheque.
Switching to an online bank or credit union will help save on fees but it can cause you stress in other ways.
Related: Free Chequing Account Comparison
Some banks limit the amount of money you can withdraw or transfer, especially when you don’t have an established history.
Having your deposit held, even for a few days, could mean the difference between making rent and getting evicted.
Still, when you’re ready to turn your finances around, you should start by fixing your banking. Here are five ways to do that:
How To Fix Your Banking Routine
Stop using debit. Debit cards are a convenient way to pay, but we pay a premium to use them. The big banks charge $11 to $15 a month for unlimited debit use.
Related: How Debit Cards Are Costing You Money
Use cash. Figure out what you spend each month on groceries, gas and other discretionary items and take out the cash you’ll need to pay for them.
Whether you use the jar method or the envelope system, try and make it work on just one or two ATM withdrawals a month.
Switch to a basic banking plan. If you can stick to cash, you won’t need to use a debit card as often, so consider switching to a basic banking plan.
These plans offer 10 to 15 transactions for about $4 a month. Fees are waived when you carry a minimum balance of $1,000 ($1,500 for TD customers), which is reasonable compared to $3,000 or more with an unlimited account.
Make it automatic. Set up all your recurring monthly bills to come out of your account automatically, or make the payments using online banking. Just make sure to stay within your free monthly transactions or you’ll pay up to $1 for each additional one.
Related: Best No-Fee Cash Back Credit Cards In Canada
Open a no-fee account. No matter how hard you try, you may find that 10 transactions won’t be enough to get you through the month. That’s where a no-fee account can help. Open one online or with a local credit union and use it for making small debit card purchases when you don’t have any cash on hand.
Use one of the 10 free transactions at your main account to transfer a slush fund – $50 to $100 – to your free chequing account so you’re covered for any small discretionary purchases.
This is a guest post from reader Diane Wilson as part of our retirement series.
We live in a small town in Northern Ontario. My husband is 74 and has been retired 12 years. I’m 70 and have been retired nine years. When we retired we had no specific plans on what we wanted to do.
My husband fell in love with golf, so he found his retirement activity. I continued to work for a few more years because I was not ready to retire yet.
After, I got a seasonal income tax job at the local tax preparation office for six years. Since my RRSP must turn into a RRIF this year, I have left that position. So I guess I’m fully retired.
The Early Working Years
During our early working years, we didn’t think very much about how to build our retirement income.
The one smart thing I did, (as I was in charge of the finances) was to set up an automatic plan. The contributions went into mutual funds at our local branch. I closed my eyes and let the amount build up.
Eventually, when the children got older, I added a monthly amount to a non-registered portfolio.
My husband’s job paid a decent wage, albeit not a large one. He was a social worker for the local Childrens’ Aid.
The one good thing the job had was a defined benefit pension with OMERS; his pension now is not too bad.
I gave up teaching and stayed home for 10 years taking care of the children. As I wasn’t suited for a teaching job, I then found employment at our local Credit Union after trying out a few part time jobs. So my wages were not much above minimum.
When a Federal government department came to our small town, I jumped on the bandwagon and actually landed a position.
Our Retirement Philosophy
Finally, my salary went up and I was contributing to a defined benefit plan as well as my RRSP. I don’t have a large pension now, as I only contributed for 13 years, but it sure is welcome.
Related: Should You Make RRSP Contributions If You Have A Pension?
We were not savvy around investments. He would put his money into penny stocks; I took the family money and put it mainly into GICs.
Back then, the GICs paid very good interest and we were able to put both children through post-secondary education.
When my widowed mother sold the family home, she gave her three children a part of the proceeds, which we promptly put into a RESP; that one came in handy.
My philosophy in those days was – lock it away and don’t touch until it’s time.
My husband and I used to discuss where we would put our RRSP dollars; it seemed that we always made the wrong choice. As soon as we bought into something, everything would tank.
Related: Why Is It So Hard To Sell Those Investment Dogs?
Not being savvy or having a huge amount to invest, we used mutual funds. Finally, out of desperation, I made an appointment to speak to a Financial Planner, affiliated with our bank.
Unfortunately, the closest one to us was three hours away. But we hit it off with him and he has served us well over the last 12 years. Yes, he sells bank mutual funds only, but he has always had our needs front and foremost.
Our portfolio has grown very nicely under his guidance in spite of the latest downturn. The most important lesson he has taught us is – be aware of fear and greed.
A Simple Retirement
What do we do in retirement? It’s not much different than what we did when we were younger.
We live a quiet lifestyle and do not travel. We go to the city a few times a year to see our daughters and now we will be going to see a new grandchild.
Related: How This Couple Spends Their Retirement Travelling
At some point, I would consider moving to be closer to them, but right now, my mother, 93, is still in this town.
Our portfolio value certainly is not large; realistically, our net worth is around $700,000. In about 15 years, our RRIFs will deplete to about $1500/year, just when we probably need the money for a nursing or retirement home.
Thank goodness for the TFSAs; they are the best thing to come along since the RRSP. By maxing out our TFSAs each year, they will grow and be available to supplement our depleted RRIFs.
We are also saving dollars to use in case of medical needs (among other things); this family seems to be hit with some awful autoimmune conditions.
We have no debt and no mortgage. It doesn’t look like we will have to use any of our non-registered portfolio, so can save that for an estate.
Retirement hasn’t changed my fundamental philosophy; I still lock it away until it’s time to use it for whatever purpose.
I learned early on that we would not be ‘rich’, if ‘rich’ is defined as being able to spend dollars indefinitely and impulsively. But, our past habits have made us ‘rich’ in many other ways.
If you’d like to share your retirement story with us please send us an email.