The question all investors have to ask themselves right now about their income-producing holdings: should I stay or should I go now?
Bonds and GICs maxed out with yields of about 4 per cent for five years just recently.
Many know the bond conundrum: Bond or Fixed Income funds fall in price – and will continue to fall in price - as bond yields rise. (Conversely, they go up as rates decline)
If you’re going to hold onto Bond or Fixed Income funds, get used to this sort of thing. Preferred shares behave more like bonds than stocks - they’re considered fixed income by some, but not all, advisers - and most types of bonds will fall in price as we continue moving through the rising rate cycle just begun.
Should you care as an investor about Bond or Fixed Income funds falling in price? If you’re tightly focused on generating income and can accept a price decline, then no. Bond or Fixed Income funds will continue to pay coupon interest commitments as rates rise, which means the income will flow.
The arguments for selling are that your prime goal is to preserve capital, or that it will drive you to distraction to see the value of CPD (and possibly other income holdings) in decline. After 2008, investors have every right to be sensitive about seeing their stocks fall in value. At the same time, however, one of the lessons of 2008 was that quality income investments continued to deliver cash to investors, even as they plunged in value.
Preferred shares were not immune to the carnage of 2008. You can see this in the fact that Bond or Fixed Income funds price is still down by almost 20 per cent on a cumulative three-year basis.
Expect another rally to begin when interest rates peak and everyone’s looking ahead to rate declines. Will you be around for the rebound of bonds and other income-producing securities? Depends on whether you’re all about income or capital preservation.
Material for this post was obtained from Rob Carrick's recent article
Saverio Manzo
www.saveriomanzo.com
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