I Doubt I Will Ever Fully Understand Fixed Income Investing in Bonds and GICs

We are ultra-conservative investors and are extremely averse to losing money. So while we have some money in the stock market we also have a large amount in fixed income investments. In particular, we have GICs and a Bond fund. And I’m beginning to doubt I will ever fully understand fixed income investing.

Weren’t Bond Returns Supposed to Collapse Last Year or This?

I’ve lost track of how many years in a row I’ve heard that Bonds are about to crash. Several people we know who work in the financial industry advised us to get out of our Bond fund two years ago.

As I’m a major procrastinator and ditherer, we didn’t get out of it yet. We did stop adding new money, though.

In 2011, our bond fund increased in value by about 8.4% after fees and commissions with no new contributions. (This was a surprise.)

In 2012, the decision to leave the money in the bond fund was a good one. (Good because we only need our fixed income to try to match inflation. We get our growth from our stock investments.) Our bond fund increased in value by about 3.75% after fees and commissions, with no new contributions in 2012.

In 2013, it cost us money. Our bond fund decreased in value by 0.93% after fees and commissions with no new contributions in 2013.

Then, something truly bizarre happened. Between December 31, 2013 and January 31, 2014, our bond fund increased in value by 2.46% after fees and commissions with no new contributions. Talk about unexpected!

By the end of February, the bond fund had increased in value 2.8% over its value on December 31. Colour me confused.

Why Don’t I Just Ditch the Bond Fund?

The reason I haven’t bailed on the Bond fund is because it’s part of a Defined Contribution pension plan. There are NO other fixed income choices in the plan, unless you count a Money Market fund that has been known to generate negative returns. So I would have to dump it all into the stock market, something I am very reluctant to do.

I’m hoping instead to slowly shift investments in our TFSAs and RRSPs towards fixed income so that I can gradually move the Bond Fund holdings into the market. But the other factor at play is that the market funds I can go into aren’t the ones I would pick for my RRSP. (E.g. they are not “buy the entire stock market with an incredibly low MER” funds.)

Why are GIC Rates Falling So Sharply In 2014?

I also don’t understand what happened to GIC rates in late 2013 and early 2014.  All through 2011, 2012 and early 2013, I would often see rates for 1 year GICs between 1.75-2.1%.

In 2014, I haven’t seen 1 year’s (on BMO InvestorLine) with rates higher than 1.65%. Even during “RRSP season.”

Does this have something to do with the slow ending of Quantitative Easing in the US? With the minor changes made to the exchange rate between the Chinese Yuan and the US Dollar? With the continuing Real Estate boom in Canada’s biggest cities? The Bank of Canada key rate is about the same. Mortgage rates aren’t hugely different. Is it Jim Flaherty’s fault? If so, now he’s retiring will that help?

I’ve been annoyed to discover that very few people report on fixed income issues. There must be 30 different articles on what the TSX did yesterday but I can’t find one on what Bonds or GICs did.

This is despite the fact that, according to The Ultimate Guide to the Canadian Bond Market, in the first quarter of 2011, the daily average trading volume in the Canadian bond market alone was 38.42 Billion dollars. Daily!

That sure makes my fixed income retirement savings look puny.

What Rate of Inflation Am I Trying to Match?

As I said, we’re hoping during this period of low interest rates for our fixed income investments to hold their own against inflation. We expect our growth (stock) investments, though, may have to help pull them back in the black.

I calculated our overall personal rate of inflation in 2012 at 1.6%. Over the period 2001-2012 our personal rate of inflation was about 2.3%.  Both are probably a bit low as the numbers used to calculate them don’t include the costs of food or clothing. So I’ve been mentally using 2-3% as my estimated personal rate of inflation. Since I lived through the 80’s, though, I wouldn’t be surprised to see 11-20% inflation again in the future.

If our Bond fund doesn’t lose any ground (or gain any) from where it is today in March, it has earned enough this year to match inflation.

So what should I do? Bail on the Bond fund and stick it into the Money Market fund for the rest of the year? You do know that Money Market funds can LOSE money, right? That doesn’t appeal to me much.

Stick it in the Equity Market funds? While markets are at or near all time highs? Seems a tad risky to someone who is extremely risk averse.

Yep, I’m dithering again. I sure wish someone with a crystal ball could tell me exactly what will happen and when. For now, I expect I’ll just leave it in the Bond Fund and get back to work. Maybe I can earn and save enough new money to cover the losses when they happen…..

And I’ll try to work my way through the book In Your Best Interest to see what I can learn. (Science fair projects and Spring Musical rehearsals permitting.)

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Do you have a portion of your portfolio in Fixed Income investments? What information sources do you try to follow to keep up with this changing market? Please share your insights with a comment.

4 thoughts on “I Doubt I Will Ever Fully Understand Fixed Income Investing in Bonds and GICs

  1. Q:Do you have a portion of your portfolio in Fixed Income investments? Nope. I have 2 dwellings we own, so I consider my secondary dwelling – the cottage, my bond/fixed investment… No mortgage on either, so they provide us with cushion should something go wrong; at least that is how I think.

    Everything else is in Cdn equities, 3/4 in Cdn mutual funds, and the rest in momentum growth stocks, which I must say have been doing quite well this year…

    Q:What information sources do you try to follow to keep up with this changing market? I use a variety of things – I have a service I use for Q’s – 5iResearch, owned by Peter Hodson, which has helped me to learn about me as an investor, some older, well off friends, some former colleagues scattered throughout the world, to know how things are doing globally, and various news sources globally, not just North American, as many domestic channels are biased to “our” ways.

    I’m not sure I will ever understand why people invest in GIC’s, bonds or fixed income, as over my investing lifetime, equities have served me quite well. We all have different thought process, but in the end want similar outcomes, a comfortable life. – Cheers.

    • Well you see the primary reason people like me invest in GICs, bonds and fixed income is we are chronic worriers! It took me a long time to decide that as long as I had enough to cover our essential living costs invested in fixed, then I could let myself try the equity markets. And actually it’s been working very well. I’m sure we could have earned more by investing more in equities but we have enough so that doesn’t bother me.

      I can see where having two fully paid off properties is providing you with a great sense of security. I have older relatives who consider their cottage to be their “nursing home” money which also seems practical.

      And thanks for the detailed answers!

  2. I’m still new to this, but having read all the blogs I can..
    “90% of investing is doing nothing” and “whatever helps you sleep at night” seem applicable.

    I should go remove the bookmarks to my accounts.. maybe just check one last time.

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