Despite the dismal returns on fixed-income investments over the last few years, investors can take steps to protect themselves.

Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "The fixed-income strategy especially during lean interest-rate periods, is important for a portfolio’s financial health. It is especially critical for a retiree who relies on the portfolio to provide ongoing income needs.”

IF YOU HAD EMBARKED ON A CRUISE FOUR YEARS AGO, NEVER LOOKED at the financial pages and came back today, you would not believe your eyes. In fact, you probably wish you’d done just that. Some painful changes have occurred in the world of interest-income yields during that period.

All categories of interest rates have been slashed, especially the shorter-term ones. While this is terrific for borrowers, it has created a struggle for investors who depend on portfolio income.

The interest-rate declines have affected all income portfolios, including personal and business accounts, RRSPs and RRIFs, pension funds and family trusts. All have suffered a noticeable reduction in income. Investors in retirement are affected the most.

Income portfolios will have to adjust investment strategies to make the best of the current times. To get a sense of the painful declines, just examine the rates in Table One below.

Say you had started a fresh 5-year fixed-income ladder in mid-2000. Your average yield would have been approximately 5.3%. Now compare that to someone starting the same ladder today. The average yield would be around a paltry 2.3%. That’s about 57% less. That hurts.

This decline demonstrates the significant impact inflicted on income portfolios in a short time. Fixed-income yields have declined considerably in four short years.

The yields on other fixed-income investments, such as government and corporate bonds, have also slipped over the past four years, not to mention yields on savings accounts.

Clearly, this has affected and will continue to affect all retirement plans. Investors now contemplating retirement are concerned about the path they are about to take.

On the other hand, those investors who have held bonds since mid-2000 are extremely happy. Those boring old bonds have provided a nice capital gain.

Table One: Pain and suffering

Let’s illustrate the interest rate cuts since mid-2000:

Note: The above rates are from the same institution for non-redeemable Guaranteed Investment Certificates, paying annual compound interest, minimum investment of $1,000.

So what is an investor to do under the present climate, especially as interest rates are expected to rise from current levels?

1. First, review your investment expectations. Re-assess all investment policies and strategies to reach your chosen goals. The fixed-income component is the stable part of your portfolio return. Therefore, make sure that the income-generating portion is prudent for the situation.

2. Studies show that asset-mix decisions have the greatest impact of any factor on portfolio returns. If asset mix is not your focus in your investment portfolio, it ought to be. The fixed-income portion is an important consideration in achieving a diversified portfolio within acceptable risks.

3. A ladder of interest-rate maturities offers protection against the ravages of interest rates. Review your investment time horizon when structuring a ladder of interest rate maturities to match portfolio needs. Right now, a prudent ladder is likely not more than 4 to 5 years in duration.

4. Investors who hold large cash resources in short-term instruments often wait too long before they initiate suitable investments. Examining the appropriate steps to achieve a variety of suitable maturities assists the plan and improves investment returns.

5. Investors contemplating retirement or in the midst of it ought to be careful about choosing instruments that offer low quality. While the increase in yield is tempting, it may not be sufficient compensation for the added risk. Investment guarantees, if any, may also be compromised.

6. Be aware of the risks of over indulging in alternative investments such as income trusts. Yes, the yields are tempting, but they too are subject to price declines as interest rates rise. They are really equities, and there is nothing guaranteed about them.

The fixed-income strategy especially during lean interest-rate periods, is important for a portfolio’s financial health. It is especially critical for a retiree who relies on the portfolio to provide ongoing income needs.

Saving more for retirement is a higher priority for many. While the dismal flxed-income yields are expected to rise, it will take time for meaningful improvements to occur.

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.