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Investor commitment to holding bonds is being tested this year like never before.

So many different types of investments have done well in the past year or so, but not bonds. The FTSE Canada Universe Bond Index was down 2.7 per cent for the 12 months to July 31, while the S&P/TSX composite index shot up 29 per cent.

A Globe reader is having trouble reconciling the performance of bonds with the rationale for including bonds in a portfolio. “If bonds are supposed to be such safe investments, why are most of my bond exchange-traded funds losing money?” he wrote.

This person owns a variety of bond ETFs holding government and corporate bonds. “Most have lost value but, of course, pay interest, which offsets the losses. Still, I don’t see why they’re considered safe. I’m 64 and therefore am encouraged to invest in bonds. I don’t get it.”

Bonds can fall in price when interest rates move higher, as they have this year. We could see more of this in the months ahead. Where bonds offer safety is in (a) paying semi-annual interest and (b) maturing and repaying investors back their capital. Bond issuers do sometimes default, but this is extremely rare for financially strong companies and almost unheard of for governments.

Bond ETFs are an excellent way to add exposure to bonds in a portfolio. Fees are low, you get instant diversification and yields are quite competitive with bonds you buy individually. But bond ETFs are unlike holding individual bonds in that they never mature and repay investors back their invested capital.

That’s why they’re best used by investors willing to hold them over the long term, which means through rising interest rate cycles like we’re seeing now and falling rate to come. Combine the ups and downs over the next decade and the combination of bond interest and gains in bond prices should produce a rate of return that lags stocks but beats money sitting around in cash.

For a higher degree of safety, consider guaranteed investment certificates from alternative banks and credit unions. They offer deposit insurance, competitive yields and they don’t change in price for the better or worse while you hold them. Not liquid, though.

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Rob’s personal finance reading list

Daycare deep dive

A list of pros and cons on the child-care policies of the major federal political parties by Generation Squeeze, an organization that advocates for intergenerational fairness in government policy.

What’s new in reverse mortgages?

A look at the reverse mortgage products offered by Equitable Bank, the upstart competitor to market leader HomeEquity Bank. Huge increases in home prices recently made reverse mortgages a more interesting option for seniors who own expensive houses but need cash.

Meet Broke Bobby

Broke Bobby is an American who makes $125,000. In a video that went viral on social media, he appears at the bottom of a list of friends who are ranked by their income. The internet has thoughts on this.

Showdown: brokers and credit cards

An interesting comparison of two ways to invest. Questrade offers more services but there are fees to trade stocks. Wealthsimple Trade offers commission-free trading, but a more stripped down experience. Now for a showdown between two premium travel reward credit cards, TD Aeroplan Visa Infinite Card and RBC Avion Visa Infinite.

Today’s financial tool

A look at how much car insurance costs vary by age, using Ontario as an example. If you’re under 30, the numbers are grim.

Tweet of the week

Details here on opting out of contributing to CPP if you’re 65 and still working. A follow-up to an item I linked to last week on when to start CPP retirement benefits if you work past 65.

The money-free zone

Curtis Harding is one of my favourite modern soul artists and I recommend his new protest song Hopeful.


What I’ve been writing about
  • Low-cost daycare is the best way politicians can address rampant anxiety about the rising cost of living
  • A supposedly safer type of equity ETF is in demand again
  • A test of your financial savvy for handling what’s ahead in housing, investing and inflation

More Rob Carrick and money coverage

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