WHY HOLD BONDS WHEN RATES ARE RISING?
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Wealth Builder
Gordon Pape writes on common-sense wealth-building strategies.



By Gordon Pape  | Tuesday, March 07, 2017


Q – Why keep bonds in a portfolio when we anticipate interest rates to go up in 2017? – Peter M.

A – Reduced risk is the primary reason. Fixed-income securities like bonds provide a safety net in the event of a stock market crash. A portfolio that is 100% exposed to equities is going to experience heavy losses if the market crumbles. Quality bonds rarely produce a negative total return in any given year, and when it does happen, the losses are usually small.

When interest rates are rising, as we expect in 2017, short-term bonds are the best option from a risk perspective. The market price of issues with long maturities will be hit harder when rates go up. Of course, any bonds held to maturity will be redeemed at par.

One more point –predictions made early in the year don’t always translate into reality, as I know from long experience. Last year, for example, bond prices rallied strongly in mid-year when interest rates unexpectedly declined. They lost most of those gains in the fall, but bonds still ended 2016 in the black. The iShares Canadian Universe Bond Index ETF (TSX: XBB) was up 1.36% last year, and had a three-year average annual compound rate of return of 4.28%. – Gordon Pape

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investornewsletter, which are available through the Building Wealth website.

Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney .

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© 2017 by The Fund Library. All rights reserved.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.

   
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