– 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
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
and on Facebook at
Notes and Disclaimer
© 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.