You Want Pain?

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I was meeting with Konstantin Boehmer – Global Tactical Bond Manager of Mackenzie Mutual funds the other day and he said a phrase that I have been preaching since interest rates hit the bottom about 5 years ago. He said:

You want real pain?

Of course the answer is; STAY IN MEDIUM TERM TO LONG TERM CANADIAN BONDS. He pointed out there is billions and billions of dollars in Canadian mutual funds in these bonds.

While interest rates are at the bottom you will be lucky to have any money left after taxes. A thirty year Canadian bond only paid 2.3% the day wrote this piece. Add in mutual fund fees and an almost 50% tax rate what’s left for you?

If and when interest rates do go up you can guarantee a negative return. I have seen a 30 year bond drop 12% in value when interest rates jumped 1%. – remember that as interest rates go up, bond prices go down. Add in mutual fund fees and feel the pain.

Real Life Scenario

I was at a Christmas open house and 2 people in the 5 who were in the conversation were just put into long Canadian bonds at the bank that month for part of their portfolios. WOW – We had just had a good year for these type of funds and thus rates were lower already. Buying at that time would take on huge risk.

We were at an upbeat gathering and rather than embarrassing them there, later I quietly gave them both my card and told them I would point out the errors of the advice; with no pushy sales pitch. It turns out they called the next day together on speaker phone. They completely understood the reasoning and were quite upset this was not disclosed to them at the time of purchase. I also had to warn them about a potential short term trading fee that they could be exposed to. More potential pain.

In October I wrote about a different scenario during this time of low interest rates and how it can cost you in a past blog: Who's looking out for me?

If you want to see what a truly independent advisor can do for you, call me at 905-846-9060, ext.3838, email me at Terry.McIntyre@manulifesecurities.ca or visit my website at www.terrymcintyre.ca.