Adrian Mastracci, portfolio manager at KCM Wealth Management, says “Pursuing higher yields, at the expense of quality and/or insurance coverage, is a strategy full of dangers."

Vancouver, BC (April 07, 2008): Investors associate equities with risks. But lately, risks have found the fan in debt and credit markets. Like the Canadian ABCP jumble and the Bear Stearns cash run.

Lower yields on fixed income investments are suddenly very noticeable. For example, a 90-day banker’s acceptance was near 4.7% last summer versus 3.3% now.

We’ve had flavours of similar situations in the past. You would think that something would have been learned over the years. Sadly, I’ve seen little evidence of learning in the financial markets.

The same gaffes of yesteryear are repeated today, over and over. Lower yields are driving many to load up on riskier investments to fill their fixed income needs.

Pursuing higher yields, at the expense of quality and/or insurance coverage, is a strategy full of dangers. I guess investors don’t think risks are going to bite them!

Appetite for undue risks

Returns eventually reward investors who focus on risks. Risks eventually catch up to investors who focus on returns.

Too often, the difference between normal and higher yields is not significant. One vital question has to be why take on the added risks. Not all fixed income is created equal.

Investors may consider various fixed income approaches. Here is a sample of what I follow:

• Spread the funds among two or more different institutions.
• Choose the larger, financially stronger organizations for GICs.
• Treasury Bills and strip or zero coupons issued by Federal/Provincial governments.
• Bankers acceptances from the top five Canadian banks.

The assumption I make in investing client fixed income money (and mine) in this list is simple. That is, if one of the top five Canadian banks incurs financial difficulties, we have far bigger problems than just our money at risk.

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.