The right balance of risk and reward is different for each individual and dependent on factors including age, income, and desired retirement income. While the stock market and foreign currency trading (forex) can bring huge returns, they carry relative risks. Fixed income investments help to reduce the portfolio’s overall degree of risk.
Fixed income investments, generally issued by the government or a corporation, offer principal safety and steady interest income.
Mortgage Backed Securities a Shared Fixed Income Investment
Mortgage-backed securities provide a monthly income for investors seeking a safe fixed-rate option. Each month, the investor receives a share of the interest and principal on a pool of several mortgages.
As with mutual funds, the risk is spread out over several investors and a large number of mortgages.
Canada Bonds a Safe Long-Term Investment
Canada bonds are completely risk-free if held until maturity. The government guarantees every cent of the principal and interest, making their bonds the safest investment choice by far. These bonds are available in Canadian or American currencies, although an American currency GOC bond is still considered Canadian content in the portfolio.
Terms range from one to thirty years, with a minimum $5,000 investment for Canadian currency bonds, or $25,000 for USD bonds. Government of Canada bonds are RRIF and RSP eligible and provide a safe option for these investment portfolios.
Provincial Savings Bonds Comfortable for Beginner Investors
Provincial savings bonds carry a slightly higher risk than Government of Canada bonds, although they still represent one of the safest investment options available. Provincial bonds pay a guaranteed, fixed level of interest and are available for one to thirty year terms. With the higher risk comes a higher yield than that offered by the Government of Canada bond.
Term Deposits and GICs Give a Balanced Portfolio Some Liquidity
Term deposits and GICs are liquid investments that offer a predetermined interest rate over a preset period. Although the investor can cash out at any time, they will pay a penalty for cashing out before the maturation date. GIC’s, available in terms as short as 30 days, are a safe choice for beginner investors. See the Quick Reference Guide to GICs for more information on guaranteed investment certificates.
How Beginner Investors Can Achieve a Balanced Portfolio
Money management is not for the faint of heart, but it is possible to create and manage a balanced portfolio with the right tools.
Before purchasing a new investment, contact a qualified investment, retirement savings or money management professional for an evaluation and advice.
How to Preserve Purchasing Power When Inflation Rates Rise
Economic recessions typically drive down interest rates on fixed income investments and usually keep consumer prices from rising very fast, if at all. As a recession eases and the economy recovers, inflation will return again as companies hire more workers and consumers begin spending more actively.
Investing in Gold
When inflation and uncertainty loom in investors’ minds, they often turn to gold as a hedge. Gold can be a comforting alternative asset, because it is tangible. Gold is physical; it can be seen, touched and admired. As a real asset, there is a level of comfort in owning gold to offset the uncertainty that often accompanies owning stocks and bonds. However, gold is not the only real asset one can own as an inflation hedge.
The term, “real assets,” generally refers to any tangible asset that provides a basic component to manufacturing or industry. Real assets have value on their own, even before they are applied to production. These assets could include other precious metals, real estate, commodities, natural resources, or even collectable cars and works of art.
Real Assets for Inflation Protection
Although investors may choose to own some real assets, such as real estate and artwork, managing and taking physical possession of large quantities of these can be expensive and cumbersome. Fortunately, there are some easy ways to incorporate exposure to real assets in one’s portfolio without taking actual possession. The financial industry has incorporated real assets exposure into many investment vehicles that are already familiar to investors, such as mutual funds, inflation protected bonds, and exchange traded funds.
Investors have literally thousands of investment choices available in the world of mutual funds. In addition to funds that invest in stocks and bonds, some specialty mutual funds invest solely in companies with strong ties to real assets such as real estate, precious metals mining, natural resources, and public utilities. The U.S. Securities and Exchange Commission website is a good source for beginning investors to learn more about mutual fund investing.
Similar to mutual funds, exchange traded funds (ETFs) are another investment option. Although similar in structure to mutual funds, ETFs trade like stocks and may offer more flexible liquidity. As a group, ETFs may be more specialized than their mutual fund cousins, providing investors with easy access to real asset investments such as gold, real estate and commodities.
While they are not real assets in and of themselves, inflation protected bonds can also be an integral part of making an investment portfolio more resilient against the ravages of inflation. Available directly from the U.S. Treasury, inflation protected securities or “TIPS” are designed to increase coupon payments and principal value over the term of the bond by linking these values to the actual inflation rate.
Investment Strategy for High Inflation
As with any reasonable investment strategy, real assets generally should be included as part of a broader portfolio rather than as the entire portfolio themselves. During those times when stocks underperform and fixed income rates lag, real assets often move in the opposite direction and can provide some positive investment returns to offset losses among other assets. Before determining how much of one’s assets to commit to this approach, it is highly advisable to meet with a financial advisor to discuss investment time horizons and individual risk tolerance for making these types of investments.