How to give more stability to your investment portfolio


For the last 7 years (out of 19 as an active wealth manager), I have not recommended to my clients fixed income investments. The main reason was the existing environment, where there was no growth investing in this asset class (and there were losses). Certainly we kept existing positions, but we didn’t add any new ones. Today I am going to present an idea, which I never thought I will…

Old new…

It is timely to consider buying a Fixed Income mutual fund. The simple reason is that the new purchase will reduce the volatility of your portfolio and eventually provide you with the income that you need. Not only do I recommend adding the fixed income mutual fund to your existing positions, but I also suggest an active portfolio manager, which may have above-average fees. Investors who (today) have been conditioned to believe that active management is expensive and not worthy and prefer the rock-bottom fee structure of indexed ETFs may be aghast at this idea, and should stop reading the rest of this article.

US bond market

Let’s have a look at the US bond market. (The ideas discussed apply to the Canadian bond market all the same). Index funds are inflexible by definition and that is a difficult strategy to implement in a rising interest rate environment. Unconstrained bond mutual funds are not rigid and have the flexibility to avoid the most troubled parts of the bond market, such as longer-dated U.S. government bonds, and are able to seek out opportunities wherever they find it. Thus an active portfolio manager using an unconstrained bond strategy can act and offset the fund’s higher fee structure. Another option of using fixed income funds would be the Short-term corporate bonds. Shorten the duration in the fixed income mutual fund and increase the yield with investment-grade corporate bonds that pay a bit more than T-notes but don’t have the big risks of junk. Quality of the investments is an important mitigating risk factor, much needed and not readily available in the high yield bond mutual funds. TIPS are Treasury Inflation Protected Securities and using them is a third way of fighting the inflation which is up across the board. Inflation is a disease, just like the high blood pressure condition. In the longer run it may kill you. Just the same, treating inflation requires raising interest rates. In the US the slightly higher wages and rents, have impacted the CPI data in November. CPI was showing a 2.5% annual rate. Being above the Fed’s 2.0% target, this is one of the main reasons interest rates have been creeping up lately. All the fixed income mutual funds which are including the “floating rate” words in their name, have a link to inflation, and have a certain degree of protection in it.

Lose your fear of volatility

It is important to acknowledge that any potential loss of capital in fixed income mutual funds (i.e. loss in bond principal) happens only if and when bonds are sold. If the bonds are held till maturity, (which is certainly the case most of the times) the face value of the bond is paid back into the fund and all the fluctuations of the bond market value in the open market don’t and didn’t matter. However seeing the fluctuation of your capital invested may be nerve racking. To minimize this unpleasant feeling, use “laddering” your bonds by staggering their maturities. This strategy involves rolling maturities (a few bonds will mature every year and impose continuous reinvestment in new issues, which will mitigate interest rate risk).

DIY or not?

All of these strategies may be used when you do individual bond purchases on your own, but … it is certain that you may not have the same access to new bond issues as a large financial institution, and sometime you won’t be comfortable buying and holding a few long-term bonds to maturity. There are liquidity concerns and reasons to worry about making an ill-timed purchase in a small number of bonds. It is much safer to pick and choose an experienced active portfolio manager with a proven track record and a clear strategy for the unclear coming future. Use the best tools to optimize your portfolio and enjoy safety of your money!

Happy New Year and good luck choosing your fixed income funds!

And when you need help choosing – call me!

Truly Yours,
Monica Weissmann, CFP, CIM
Financial Advisor | Manulife Securities Incorporated
Life Insurance Agent | Wealth Management by Monica Weissmann