Bond knowledge for educators
With recent high market volatility, many investors have been losing their appetite for risk, and taking shelter in bond funds and GICs.
As with any type of investment, bond funds and GICs also come with risks — and benefits. The sooner you understand the risks, the sooner you can reap the benefits, and settle on the right mix for your portfolio. At Educators Financial Group, we can help find a risk balance you’re comfortable with, while taking into account your individual end-goals.
When it comes to bonds and GICs, here are 3 risks to take note of:
1) What you need to know about bond risks
Bond funds are basically IOUs. When you buy one, you’re loaning money to the government or a corporation. The biggest threat to bond prices is interest rates. When rates go up, prices of existing bonds go down, and vice versa.
The reason prices drop is that at a higher rate, new bonds are paying out more to investors. Therefore, the price of existing lower-rate bonds will sink in order to compete with the new higher-interest bond.
2) Watch out for GIC risks
A guaranteed Investment Certificate (GIC) is an investment that locks in a specific rate for a defined period. GICs are great for preserving investors’ money, but cannot always be counted on to protect the dollars’ value. Hence the second risk: Inflation, or a rise in prices. With the current inflation rate being higher than some GIC rates, prices of goods are rising faster than GIC returns. As a result, some GIC investors may be finding goose eggs in their nest egg.
3) Don’t run the risk of bad credit
The creditworthiness of the borrower is the third risk. All bonds in a bond fund are given a credit score. A triple-A score is the highest; anything south of BBB raises your risk.
What makes bonds secure
Bond funds are a buffer against the hikes and dips of the market. These funds help to cushion the effects of market volatility while preserving your capital and providing some income. As an investor’s age and capital protection becomes increasingly important, bond funds are a viable middle ground between equity
funds and cash.
