Bond Investing Dummies

In Your Best Interest

Do you know where interest rates are headed? Nobody knows for sure but when you listen to the mainstream network financial news they all agree we’re going higher. If that’s the case then the value of any bonds you own are going down. I’ve seen the Bond ETFs I hold sink dramatically in the last few weeks.

In Your Best Interest: The Ultimate Guide to the Canadian Bond Market

by W.H. “Hank” Cunningham

From Amazon:

In Your Best Interest will give you the tools to demystify the fixed income market and meet your income and retirement needs. In Your Best Interest will put you ahead of the average investor or financial advisor by giving you the tools to demystify the fixed income market and meet your income and retirement needs.

Read what others are saying about this bond book here

At the same time, the yield on those bonds will go up. So, the price goes down and the money they pay-out monthly goes up. It’s not a bad trade off if you don’t mind seeing some red ink beside an investment you hold in you’re account.

That’s not the reason you hold bonds nor should it be the reason to sell them. You hold them to offset the volatility that the stock portion of your portfolio can dish out and again nobody knows when that will happen. It’s because of this uncertainty you need to hold bonds.

How much? What kind? In what amounts?

Like I stated at the home page on this blog. All of the information on personal finance can be found for free on the internet somewhere. I was curious as to why a retiree like myself should hold bonds in his portfolio when the value would be going down. So I reached out to another blog I follow, here is my question and his subsequent answer;

Q. Hi Garth (Turner) of thegreaterfool.ca

I need to grow my monthly income to keep up with the cost of living. The distribution rate on bond etfs is going down every month so why have 17% of my money invested in this asset class? Can you provide some wisdom here on how to grow income rather than balanced portfolio theory. Thanks:)

A. This topic has been addressed here many times. So pay attention. Of the 17%, less than half are in low-yield government securities, whose functions are to (a) decrease portfolio volatility so you sleep at night and (b) to offset dips in equity values since these are generally negatively correlated with stock markets. The remainder of the bond component in a balanced portfolio is made up of corporates, provincials, high-yield and real return bonds, all of which beat GIC returns, are 100% liquid and also temper volatility. Combined with an equal weighting in preferreds (about 18%) the fixed-income sleeve should deliver a yield of about 3.5% while being fully liquid. More than a GIC,     completely cashable and flexible, with the potential of capital gains. ~ Garth 



When the pros talk of a balanced portfolio as it relates to bonds most recommend you hold 40% of your money in that component. This is standard practice. So, it’s no wonder that is the type of response you get when you ask a question. It’s because they want to protect themself should something bad happen and you stage a revolt.

I don’t have any portfolio I manage with that kind of component because I hold a pension and to me it already acts like a bond. In fact, it’s better than bonds because the income part is indexed to inflation so I get a cost of living raise each year.

Bonds don’t give you that, combined with the fact their value goes down. You would have to sell at a loss. Should you sell your bonds in this negative environment? Absolutely not, only a dummy would do that and the point of all this is to stop doing dumb things with money.

The reason you want to just hang on is that interest rates in my lifetime have been and are still at historical low levels. Bonds are an extremely important part of your overall portfolio. They provide you with balance, stability and insurance against a world going nuts after a Trump election. Do yourself a favour and educate yourself a little further by studying the whole bond market and how it works and why you should hold some in your portfolio.

You can purchase Hank’s book here

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