Dale Jackson

Personal Finance Columnist, Payback Time

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Any good financial advisor will tell you it’s important to always have a portion of your investment portfolio in fixed income. Yields may be near rock bottom right now but that small, reliable, gain from bonds can help cushion the blow of an equity meltdown like we saw in 2008.

The problem is, most Canadians invest for retirement through mutual funds. On that front, advisors are also mutual fund vendors and can only offer fixed-income mutual funds. Bond fund returns aren’t fixed, and half of the meagre returns from the average fixed-income fund are swallowed up by fees.

Annual fees, or management expenses ratios, for Canadian fixed-income funds range from 1.85 per cent to 2.88 per cent. After fees the average Canadian fixed-income fund returned 1.6 per cent last year. Some actually lost money.

A portion of those fees go toward compensating the advisor, who would be less inclined to present practical alternatives

Investors would be better off putting their fixed-income dollars in a high-interest savings account or guaranteed investment certificates (GIC), which can yield two per cent.

Even better, investors can create a separate fixed-income portfolio with the help of a full service financial advisor with access to the bond market. The most popular strategy, known as laddering, provides frequent opportunities to get the best going rate by staggering maturities through three to five-year periods. A good mix of government and corporate bonds could easily generate a four per-cent return.  

You can keep the ladder tight until yields start heading up on longer-term bonds – and then start reaching further into the future.