The following text may have been generated by Optical Character Recognition, with varying degrees of accuracy. Reader beware!

T Diversify as bond market is risky to predict Dollars & Sense Peter Watson Guest Contributor 17 | Thursday, January 9, 2014 | OAKVILLE BEAVER | www.insideHALTON.com he million dollar question these days is when will interest rates rise and how much that increase will cause bonds values to decrease. While bonds are intended to be safe, their potential decline in value is of concern. They are in a portfolio to provide security against holding only stocks, which more volatile. We can review how bonds work. That is fairly simple. Then we will step outside the theoretical world and observe how bonds have actually performed in the past. Governments and companies raise money by issuing bonds. Investors lend money to these issuers by purchasing these bonds. The issuer agrees to pay interest and at a future maturity date repays the full amount of the loan. The potential problem comes with rising interest rates. What happens if you lock in at an interest rate of three per cent and one year later rates increase to four or ve per cent? Your bond will be less attractive and its value will decline. New bonds with the higher interest rate will be more desirable and sell at a higher price. You will still get the full amount of the bond back after 20 years. During that time, however, your interest rate will be lower than other bond investors. As stated, the current value of your bond will decline which is signi cant if you do sell it on the open market. The longer the bond term, the more it will decline in value. Holding a poor interest rate bond for a long period is more damaging than holding it for a shorter time. Bond owners who are defensive against the potential of holding bonds during a period of rising interest rates will only buy bonds with a shorter maturity dates; for example, less than ve years. It should be fairly simple to determine how to make a pro t using the theory of how bonds work. Unfortunately, predicting the rise and fall of the bond markets is as elusive as predicting the future of stock markets. Experts do it all the time and often their predictions fail. There have been four periods during the last 30 years where interest rates increased by more than 1.5 percentage points over a 12month period. You might guess during those times you would lose money owning bonds. You might also guess that longer term bonds would have declined more than shorter term bonds. Data made available by Barclays Bank for U.S. government bonds shows how actual market performance does not always follow the logic of what you might have predicted. The two bond indices used are the Barclays Intermediate and the Barclays Long-Term. When examining intermediate and longterm bonds during the four separate periods of interest rate increases, it is surprising two of these four periods had better results for long-term bonds. Of the eight different categories, seven had positive returns. The only loser was long-term bonds at the end of the 1970s when interest rates shot up by more than 15 per cent. Rising interest rates are a problem for bond holders, but the largest risk is in ation. If higher interest rates help control in ation then that is ultimately better for the bond holder. What should you do while most are predicting an increase in interest rates? Our recommendation is diversify your portfolio based on your needs. You cannot predict various markets so do not risk your money by attempting to do so. You can control how you balance your portfolio and that is your best strategy. -- Submitted by Peter Watson, MBA, CFP , R.F .P ., CIM, FCSI., Certi ed Financial Planner Don't miss these, and other great deals! Visit Proudly Canadian Follow us: @wagjag facebook.com/wagjag Buy Online: 53% off $19.00 $19 FOR $40 TOWARDS HEALTH PRODUCTS AT POPEYE'S SUPPLEMENTS CHOOSE FROM 15 LOCATIONS Buy Online: 81% off $39.00 Buy Online: 52% off $12.00 UP TO 81% OFF DENTAL HYGIENE CHECKUPS AND LED TEETH WHITENING AT JW DENTAL HYGIENE (3 OPTIONS) UP TO 61% OFF PAINTBALL AT CAMERON SPEEDWAY & AMUSEMENTS (2 OPTIONS) 1 Brought to you by How to buy a WagJag: Go to www.wagjag.com 2 Click buy on the offer and follow the instructions. 3 Receive your deal, tell your friends and enjoy!