Tag Archives: fixed

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

Posted on by

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.)

Related Reading

Join In
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.

How to Invest in the HISA AAT770 in Your InvestorLine RESP Account

Posted on by

OK, you’ve had a RESP set up at BMO InvestorLine for years. Your combination of low-fee market-index-mirroring ETFs and a GIC ladder has been ticking along earning a reasonable profit. Now, with a shock, you realize it’s the spring of the year that your eldest child is starting post-secondary education in the fall. It’s time to have some cash ready in the account for those first horrific bills. You have 2 GICs that just matured. What should you do with that cash? Here’s how you can invest it within your InvestorLine account in the high interest savings account fund AAT 770.

Another Reason to Move your RESP to a Self Directed Brokerage Account

I just realized that this HISA fund is yet another reason why you should consider moving your RESP to a self directed brokerage account once you have enough money within it to not need to pay a minimum account balance fee.

In January 2014, for their regular RESP accounts, BMO was paying 1.0% interest.

In contrast, BMO InvestorLine was paying 1.25% on its high interest savings account fund AAT 770.

To be fair, BMO is paying 1% on any amount invested from $1 up. BMO InvestorLine requires you to buy a minimum of at least $5000 of AAT 770. UPDATE 2017 10 03, the minimum purchase is $1 000. And InvestorLine pays 0% on cash account balances.

Still, if you have the $5000 1 000 or more, you can get an extra 0.25% at InvestorLine.

And at other brokerages

NOTE: A self-directed RESP brokerage account at CIBC Investor’s Edge does not have any annual fee nor any minimum balance. (This is as of the time of writing in February 2014. Check the terms again before signing up.)

How to Park Your RESP Cash in the High Interest Savings Account Fund AAT770 at InvestorLine

  1. Sign in to your InvestorLine account/s.
  2. From the drop-down list at the right side of the screen, select your RESP account.
  3. From the Trading tab, select Fixed Income.
  4. Under the Inventory Search section, select High Interest Savings.
  5. If you’re not familiar with this product, under the heading
    BMO High Interest Savings Accounts in CAD,
    click on the Terms and Conditions link and read the details.
  6. If you’re sure you want to invest in AAT770, click on the link:
    BMO CAD HIGH INTEREST SAVINGS ACCOUNT
  7. From the drop-down Action: list, select Buy.
  8. Click on the Recent Closing Price button to confirm that AAT770 is a no load fund priced at $1.00 per unit.
  9. In the Amount in Dollars: field, type in what you want to buy.
    You have to purchase at least $5 000 $1 000 for your first purchase.
  10. For the Dividend Option: select either Cash or Reinvest.
  11. In the Contact Phone #: field type the number you can be reached at.
  12. Click on the Review Order button.
  13. If you’re putting the order in after 2 p.m. ET it will display a message:
    Warning: This order will receive today’s price on a best efforts basis.(14603)
    If that’s ok, click on the Accept All Warnings button.

The Mutual Fund Order Review screen will open.

  1. In the Please enter your password in order to submit your order: field, type your trading password.
  2. Click on the Submit Order button.
  3. Copy and paste the Mutual Fund Order Confirmation into a document and save it to a secure disk or stick for future reference.
  4. If you are finished with your InvestorLine account, click on the Sign Out link.
  5. For increased security, clear your browser cache and close your browser session.

You’re done! Now you just have to wait for that first huge bill this fall. Sigh.

Related Reading

Join In
Do you hate seeing your RESP cash sitting at almost no interest? Do you have any suggestions other than a HISA fund? Please share your experiences with a comment.