Investor commitment to holding bonds is being tested this year like never before.
So many different types of investments have done well in the past year or so, but not bonds. The FTSE Canada Universe Bond Index was down 2.7 per cent for the 12 months to July 31, while the S&P/TSX composite index shot up 29 per cent.
A Globe reader is having trouble reconciling the performance of bonds with the rationale for including bonds in a portfolio. “If bonds are supposed to be such safe investments, why are most of my bond exchange-traded funds losing money?” he wrote.
This person owns a variety of bond ETFs holding government and corporate bonds. “Most have lost value but, of course, pay interest, which offsets the losses. Still, I don’t see why they’re considered safe. I’m 64 and therefore am encouraged to invest in bonds. I don’t get it.”
Bonds can fall in price when interest rates move higher, as they have this year. We could see more of this in the months ahead. Where bonds offer safety is in (a) paying semi-annual interest and (b) maturing and repaying investors back their capital. Bond issuers do sometimes default, but this is extremely rare for financially strong companies and almost unheard of for governments.
Bond ETFs are an excellent way to add exposure to bonds in a portfolio. Fees are low, you get instant diversification and yields are quite competitive with bonds you buy individually. But bond ETFs are unlike holding individual bonds in that they never mature and repay investors back their invested capital.
That’s why they’re best used by investors willing to hold them over the long term, which means through rising interest rate cycles like we’re seeing now and falling rate to come. Combine the ups and downs over the next decade and the combination of bond interest and gains in bond prices should produce a rate of return that lags stocks but beats money sitting around in cash.
For a higher degree of safety, consider guaranteed investment certificates from alternative banks and credit unions. They offer deposit insurance, competitive yields and they don’t change in price for the better or worse while you hold them. Not liquid, though.
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Rob’s personal finance reading list
Daycare deep dive
A list of pros and cons on the child-care policies of the major federal political parties by Generation Squeeze, an organization that advocates for intergenerational fairness in government policy.
What’s new in reverse mortgages?
A look at the reverse mortgage products offered by Equitable Bank, the upstart competitor to market leader HomeEquity Bank. Huge increases in home prices recently made reverse mortgages a more interesting option for seniors who own expensive houses but need cash.
Meet Broke Bobby
Broke Bobby is an American who makes $125,000. In a video that went viral on social media, he appears at the bottom of a list of friends who are ranked by their income. The internet has thoughts on this.
Showdown: brokers and credit cards
An interesting comparison of two ways to invest. Questrade offers more services but there are fees to trade stocks. Wealthsimple Trade offers commission-free trading, but a more stripped down experience. Now for a showdown between two premium travel reward credit cards, TD Aeroplan Visa Infinite Card and RBC Avion Visa Infinite.
Today’s financial tool
A look at how much car insurance costs vary by age, using Ontario as an example. If you’re under 30, the numbers are grim.
Tweet of the week
Details here on opting out of contributing to CPP if you’re 65 and still working. A follow-up to an item I linked to last week on when to start CPP retirement benefits if you work past 65.
The money-free zone
Curtis Harding is one of my favourite modern soul artists and I recommend his new protest song Hopeful.
ICYMI
What I’ve been writing about
- Low-cost daycare is the best way politicians can address rampant anxiety about the rising cost of living
- A supposedly safer type of equity ETF is in demand again
- A test of your financial savvy for handling what’s ahead in housing, investing and inflation
More Rob Carrick and money coverage
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Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Are your parents giving you money? • Why it’s time to stop shaming the renting lifestyle • Is now the right time to buy a house? • Why are young Canadians leaving the cities they love? • Eating in: How COVID has shifted our food spending • Crisis-proof your finances? • Can you afford to live downtown? • The cost of kids
- ✔️ The housing file: The housing boom is ripping apart the financial fabric of Canada • Shut out: A well-qualified millennial home seeker throws up his hands after losing multiple bidding wars • Big city housing affordability is over – now what? • She sold her Toronto house to retire somewhere cheaper, but it didn’t work • How young adults and the whole country win with a tougher mortgage stress test for home buyers • Can’t afford your house? It’s likely not your fault
- 📈 Investing: Robo-advisers have grown out of the novelty stage. Here’s help in finding one right for you • The 2021 ETF Buyer’s Guide: Best Canadian equity funds • The 2021 Globe and Mail online brokerage ranking: Who’s best for investing … and answering the phone • Are these the stock market returns of a lifetime? • On the cusp of retirement and wondering about an ETF that pushes the limits on aggressiveness
- 💰 Your money: The five most important numbers for checking the health of your personal finances • Today’s freakishly low mortgage rates can’t last. What will pandemic home buyers do when they rise? • There’s a cost in money, isolation and family stress when seniors choose to remain in their own private homes • Taking CPP early can cost you $100,000 and limit your long term options • Fleeing the city for the suburbs? Watch out for higher property taxes, more cars and other costs
Are you reading this newsletter on the web or did someone forward the e-mail version to you? If so, you can sign up for Carrick on Money here.
Rob Carrick