Personal Investor: Higher rates a wake-up call for investors
The biggest non-Trump news to come out of Washington this week will be an expected hike in the benchmark interest rate by the U.S. central bank.
It won’t have the drama of alleged foreign manipulation in a U.S. presidential election but it might have a bigger impact on Canadians saving for retirement.
The Federal rate could top one per cent – not a lot, but another tick toward inevitably higher borrowing rates.
That’s good news for savers suffering from miserably low returns. Investment advisors recommend a portion of any portfolio be set aside in fixed income no matter how low yields go. Fixed income can act as a risk anchor against equities. A two per cent return looks pretty good in a year when equities lose half of their value, which is what happened to the TSX in 2008.
Here’s a fixed income checklist to discuss with your advisor:
Re-evaluate fixed income weighting: Determine if you are comfortable with the portion of your portfolio that is set aside for fixed income. The old rule-of-thumb was your age – if you’re 50 years old, half of your portfolio should be in fixed income – but that was set aside when interest rates tumbled. To meet investment return goals advisors needed to put their clients into riskier income returns such as dividend stocks and real estate investment trusts (REITs).
Laddering maturities: By keeping maturities short and laddering them over different time spans, investors can open themselves up to more frequent opportunities to get the best going rates when yields are moving up.
Diversify risk: A good mix of GICs, government bonds and investment grade corporate bonds can keep your fixed income portfolio safe while squeezing out the highest returns.
No trading before maturity: Fixed income means holding bonds to maturity. Risk enters the picture when they are traded before maturity. For that reason bond funds are not really fixed income.