Agreed.

“CC said: Bonds, after all, are a promise to return the nominal face value. Inflation could eat up that value”

Longer duration bond returns should reflect expectations about inflation. One way to take care about inflation risk is to buy for example 5 yr bond every year and sell a 5 yr bond that matured that year. That way you will keep your overall returns somewhat in line with inflation.

@Basil2: Personally, I don’t think a 100% stock portfolio is suitable for most people. In the same vein, I don’t think a 100% fixed income portfolio is suitable either. Most people cannot afford to avoid stocks altogether. The lower returns from fixed income means they have to plan to save much more right from the beginning. The best way to manage risk is to hold a suitable mix of both — not avoid one entirely in favour of another.

@Phil: I agree with characterizing bonds as wealth preservers. But there is risks in bonds also — the risk that they won’t keep up with inflation. Bonds, after all, are a promise to return the nominal face value. Inflation could eat up that value. Today, we have real-return bonds. But they aren’t risk-free either. A person’s personal experience of inflation may not be comparable to the Government’s definition at all. The point is there are risks with every asset classes — nothing is truly risk free.

In the case of a 25-yr bond, it would be there waiting for your retirement – if you are 25 yrs away from retirement. In the case of a 5-yr GIC, it could be money set aside to buy a new car if you have, say, 5 or 6 yrs of life expectancy remaining in your current vehicle. Or, it could be the down payment on a house if you set a goal of 5 yrs to save enough money to buy a house. Or really any major capital purchase. A boat, a round-the-world vacation, whatever. A high-interest savings account is used for emergency funds because it isn’t “locked in” for some term like a GIC.

The problem with buying stocks is that you’re not guaranteed to have that cash 25 yrs from now at retirement. Or in 5 yrs to buy that new car or put the down payment on a house. While the POTENTIAL is there to outpace the investment return of a bond or GIC, it’s not guaranteed to be there WHEN YOU NEED IT.

Of course, when I say “fixed income”, I’m referring to government bonds and CDIC backed GICs. As we’ve seen with corporate bonds and commercial paper, they can be as volatile as stocks and they may not be there when you need it! I also exclude bond FUNDS, which I would never advocate anybody to buy – I’m referring to actual bonds which have a maturity date and you’re guaranteed the return of your principal.

If you’re into buying corporate bonds, then I actually put it in the same category as buying stocks in terms of risk. The main difference is that you know what your investment return will be if the company survives to your maturity date! And, of course, there is more money in the pot available for you than a common shareholder if the company goes bust.

TEMPLE