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By Adrian Mastracci
North Shore News
Business Section, "Loose Change"
Sunday, February 3, 2002
Several changes of significance took place in the 2001 world of
interest bearing investments. And, they continue
into 2002.
In particular, all categories of interest rates were reduced, especially
the short-term rates up to one year. This poses a wonderful problem
for borrowers. However, it presents a challenge to those who depend
on their portfolio for income.
A small consolation for the income portfolio is that income taxes
are lower. However, income portfolios will have to adjust strategies
to make the best of the current times.
The following table illustrates the typical interest rate pain
sustained since January 2001:
|
Date
|
1 Year
Rate
|
2 Year
Rate
|
3 Year
Rate
|
4 Year
Rate
|
5 Year
Rate
|
|
Jan. 4, 2001
|
4.40%
|
4.65%
|
4.75%
|
4.80%
|
4.85%
|
|
Apr. 5, 2001
|
3.30%
|
3.50%
|
3.70%
|
4.00%
|
4.30%
|
|
Jan 17, 2002
|
1.05%
|
2.00%
|
2.70%
|
3.30%
|
3.65%
|
|
Change
|
-3.35%
|
-2.65%
|
-2.05%
|
-1.50%
|
-1.20%
|
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All rates quoted above are from the same institution for non-redeemable
Guaranteed Investment Certificates, paying annual compound interest,
minimum investment of $1,000.
This decline clearly demonstrates the significant impact on income
producing portfolios. These strategies should assist:
- Take the time to review your investment game plan. It should
contain all the policies and strategies you will follow to reach
your chosen destination. If you're unsure about the plan's appropriateness,
resolve to seek out professional counsel.
- The bond and cash component of your portfolio is the stable
part of your portfolio return. Therefore, make sure that the income
generating portion is prudent for your situation.
- Studies have concluded that asset allocation decisions have
the greatest impact on your portfolio returns. They explained,
on average, 94% of the contribution to total return.
- Clearly, if asset allocation is not the focus in your investment
portfolio, it ought to be.
- A ladder of interest rate maturities has long been recognized
as an effective method of protecting against the ravages of falling
interest rates.
- Review your investment horizon and structure a ladder of maturities
to match your investment time frame.
- If you are contemplating retirement, or in the midst of it,
be careful about choosing instruments that offer low quality.
The increase in yield may not be worth the added risk you incur.
- Be mindful of all the investment costs. Some vehicles, such
as bond funds, have an ongoing management expense ratio (MER).
Often, a front load fee on purchase, or a back end fee on disposition,
may apply.
- Be aware of the $60,000 CDIC coverage available, if any, on
the interest bearing vehicles that you purchase.
The fixed income strategy that you follow, especially during leaner
interest rate periods, is vitally important for your portfolio's
financial health.
This is even more critical when a prudent return from your portfolio
is required to sustain your ongoing income needs.
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