Bonds are not a Safe Haven Right Now

in Bond, GIC, N.C.F.B.A.

One of the nice parts about writing this blog is I have met some folks who know a great deal more about Investing and Investment vehicles, and one of those is our friend Preet Banerjee. I met Preet through the Canadian Capitalist (for those who don’t know the story look at the N.C.F.B.A. links on my sidebar most of these members have dinner and discuss things every few months), and he has been kind enough to explain a great many things to me about investing and such.

The last time we met, I asked Preet if he might be doing a post on Bonds and how many folks think they are a “safe” investment and he promised me one was in the works and here it is: The ‘safe’ part of your portfolio could get you in trouble. If you have not read this article in the Globe, please go do so, especially if you are or are thinking of investing in Bonds and you are not advanced in the nature of Bonds.

Handcuffs

Standard Smith & Wesson Handcuffs

This is not talking about the CSBs (Canada Savings Bonds) you grew up with, these are the Bonds that are in Bond Mutual Funds, or Bond ETFs, we are sort of in a perfect storm for these vehicles to lose their investors money (when in fact the investors think they are in a very safe place).

Interest rates are so darn low, that any small change (like a 1% change), can cause these funds to lose money. I won’t go into details, because I don’t think I am sophisticated enough to do the topic justice, but just understand that if you think your money is “safe” in a bond fund, you need to think again.

If you want safe and boring growth, GICs or CSBs are the choice of boring, milk toast, don’t want ulcers (or growth) investors, stick with those for now, if you want safe (and incredibly slow) growth.

If you want safety, make sure you know that it is safe.

 

 

 

{ 11 comments }

  • Paul March 26, 2011, 10:44 AM

    I went with a combination of a real return bond fund and a 3-year strip bond. The real return bond fun creates a hedge against rising inflation, and the strip provides me with a guaranteed 3%+ annual return.

    Reply
  • Dick Tater March 26, 2011, 8:40 AM

    I suggest you all check the five year return of the
    S&P 500 to the return of high yield bonds. SPY vs HYB
    It is pretty evident who won.

    Reply
    • bigcajunman March 26, 2011, 9:19 AM

      Well Dick, why not leave the actual answer?

      Reply
  • My Own Advisor March 21, 2011, 7:16 PM

    Good post, and yes, agreed, if you want “super safe” then GICs are your man.

    I would never buy CSBs. I’m just not that boring nor do I want to lose out to inflation that much 🙂

    Reply
  • Evan March 21, 2011, 3:21 PM

    Not sure what you have up there in Canada but there are some very safe products sold by insurance companies in the States. Some of these companies have been around since the 1850s – do they have great returns? Nope but neither do gov’t bonds right now and they are also backed usually by some sort gov’t insurance program.

    Reply
    • bigcajunman March 21, 2011, 3:52 PM

      Ur um, yeh… Insurance investing? Not cool (IMHO) Buy Insurance from Insurance companies, that’s it.

      Reply
  • Echo March 21, 2011, 8:12 AM

    I’ve never held bonds in my portfolio, although that might change as I get older. They can be a good source of income, but in this low rate environment they likely carry a lot of risk as well.

    Thanks for the link to Preet’s article, I’ll check it out!

    Reply
  • Sustainable PF March 21, 2011, 7:44 AM

    One thing i’ve always been curious about is bond allocation when you have a “gold plated pension”. If you have this “safe” set of funds for retirement, should I even bother with bonds?

    Reply
    • bigcajunman March 21, 2011, 7:52 AM

      Depends on what you call “safe”, and what “safety” you want is the easy answer. You want “safety” head to GICs.

      Reply
  • Traciatim March 21, 2011, 6:14 AM

    CSBs, seriously? That rocking 0.65% will sure rocket your savings forward. I don’t know how anyone can recommend CSBs for anything, even an ING/Ally/PCF savings account will return around double what CSBs do, and they GIC rates only go up from there.

    Reply
    • bigcajunman March 21, 2011, 6:19 AM

      Agreed, I simply point out the CSB’s will not DECREASE in value, as a savings vehicle, they do stink, but they are SAFE.

      Reply

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