The New Face of Fixed Income

For the last 30 years bonds have helped boost portfolios. With fixed income prices now falling, it’s time to rethink how these assets fit in a portfolio.

You might remember the 80s for its funny hairstyles, tight jeans and a variety of new-wave music. What may not come to mind is the start of a deflationary period that has created many happy bond investors.

Fast forward 30-plus years and the landscape is somewhat different – although funny hairstyles, tight jeans and experimental music still remain, creeping higher interest rates and signs of an inflationary environment means that gone are the days of viewing bonds as the path to greater returns.

So, then, what are they viewed as, and is there still a place for them in your portfolio?

a changing role

Simply put, when interest rates rise, bond prices fall. This is because investors won’t pay for a bond that has a lower interest rate, which ultimately decreases the value of the bond.

Beginning in the early 1980s, bond yields began to move lower as the threat of inflation subsided. This allowed investors to enjoy a combination of high current income and strong capital gains without much volatility – a trend that has been in place for several decades.

But now, with bond yields rising, fixed income prices are falling. As a result, their purpose in your portfolio is changing.

“The role that fixed-income plays going forward is really as a diversifier,” says Les Grober, Senior Vice-President and Head of Asset Allocation with Investors Group. “One of the big reasons investors still want to own bonds in their portfolio is that the correlation between bond prices and stock prices is still negative.”

Since bonds and stocks tend to move in different directions, from a diversification standpoint, owning bonds in your portfolio can reduce its overall volatility.

“Bonds still provide a safe-haven,” says Grober. “They’re there to preserve capital, and provide diversification benefits and dampen down one’s volatility in a portfolio. That’s a significantly different role than what they’ve played in the past.”

value of diversification

Steve Rogers, Investment Strategist with Investors Group Investment Management, highlights the value of this type of diversification.

“There’s always value in low correlation assets within a portfolio,” says Rogers. “Combining assets to improve returns, without increasing your risk, is key.”

a changing sentiment

Changing one’s view of the role fixed-income has been playing, from a portfolio booster to a diversifier can be a challenge for some investors, but adjusting your investment choices so they adapt to the current climate is important.

“We’re likely in the very early innings of an inflationary environment,” says Grober. “There’s big question mark about what that looks like and how we get there, but most people would agree that the deflationary risk we’ve been fighting since the financial crisis is ending.”

The new role that bonds can play in your portfolio is a good place to start, and advice from your financial advisor can help you make the decisions that are right for you.

About David Kindy

David has been a keen and active investor in his overall financial health since high school and a client of Investors Group for the past 10 years. As a result of a down turn in the water treatment industry, David decided to take a new path in his career from being a global project manager and became a licensed financial professional with Investors Group. Investors Group, a top performing financial services company, blending with his high moral value made for an easy career transition. This allows David to help individuals with their own financial health and help protect families from life’s uncertainties. David also donates time and money to many philanthropic activities supporting many non-profit and charitable organizations. As a foster parent for the Lion’s Foundation of Canada Dog Guides, David and his wife have raised 8 dogs for the program. He sits on the Orillia Rowing Club board helping to steer the club to a prosperous future. David has also served on the Recreational Advisor Committee for the City of Orillia for the past 3 years. Recently, David has become involved with COPE Service Dogs, a charity out of Barrie that helps youth at risk with their Canines in the Classroom program which, ultimately leads to trained mobility assistance dogs. Regardless of age or income, David enjoys working with clients to reach their goals for a financial secure future utilizing the 6 pillars of financial planning: Cash Management, Education Planning, Investment Planning, Tax Planning, Retirement Planning and Estate Planning.
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