ETF

Why fixed income securities?

Fixed income products (i.e. bonds) are an essential portion of every portfolio. Your first step as an investor is to establish the Asset Allocation appropriate to your circumstances, including the portion to be invested in bonds; see Asset allocation and Fixed income (debt)- In general) on our site. The fixed income portion of your portfolio will give you a modest income source and should also stabilize your portfolio in the event of losses in the higher risk equity portion. You will not become rich with bonds, but invest 100% of your portfolio in equities and you are setting yourself up to become poor in the short or medium term (as some investors are discovering during the current crisis); see Why not all equity portfolios? on our site.

Our prerequisites for an independent investor

• Our site favors investing in debt securities with the following characteristics for the fixed income portion of a portfolio invested for the long term (see Fixed income (debt) - In general ):
• A reasonable return for the degree of risk being assumed. We generally do not recommend high risk debt securities; see article Luukko 2009 doc.1276.
• Investments that minimize investment costs, whether trading commissions, management fees or other; see Costs of investing- Introduction and Mutual Fund expenses .
• Our site does not believe that the average self-investor has the required expertise to regularly beat the market (measured against the major bond indices) over the long term by individual security selection.
• Our site believes that only a minority of bond fund managers have the expertise to regularly beat the market (again measured against the major bond indices) over the long term, net of management fees, through individual security selection, and most importantly, few if any investors can identify in advance who those exceptional managers will be.
• Our site does not believe that it is possible to successfully regularly predict changes in interest rates. Accordingly we believe in investing in a way that protects you against unforeseen interest rate increases that can reduce the value of your existing debt security investments; see article 2009 Elton doc.1273 on timing and mutual fund managers . Our preferred method for this purpose is building a bond ladder; see Building a ladder on our site.
•  We favor easy to understand investments. The average independent investor does not have the expertise necessary to understand the details of complex documents governing most corporate bonds; see our commentary BCE/Bell, their bondholders, and the Supreme Court of Canada .
• Always consider the degree of liquidity (how easy is it to cash in or resell before maturity) of any debt security you are considering. You never know when you may want to sell your investments. In the face of two securities with equal (or almost) returns, prefer the liquid security over an illiquid one.
• You should open accounts allowing the maximum investment flexibility with a broker that offers the full range of basic financial products. Having done that, for administrative reasons give preference to debt securities that you can purchase in one of your accounts at your usual broker. Each time you transfer your money (especially if it is a non-electronic transfer) to another broker or another institution to make an investment, you are complicating the management of your portfolio. If you use more than one broker or financial institution, you should have sound reasons.
• Taxation as such is not a characteristic of a debt security, but remember that tax considerations generally favor holding debt securities in your RRSP or TFSA; see on our site Recommendations to optimize your RRSP and Asset allocation- RRSP versus non-registered accounts . And certain debt securities (notably strip bonds) should only be bought inside an RRSP or TFSA; see our commentary TFSA’s: searching for the perfect long term investment .
  
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