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Advice on preserving capital

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asked Feb 08, 2018 06:03 PM by
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Hi Jin,

Related to your recent blog post, if the return on bonds and equities will likely drop, what do you recommend for capital preservation? You have mentioned Gold (e.g. CGL-C.TO), and there is always the option of a savings account, but I don't want to transfer money out of Questrade to a savings account such that cash is available for buying on the low.

Thanks, matt

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answered Feb 09, 2018 08:48 AM by
Jin Won Choi gravatar image Administrator

Hi mmikitka,

I think some clarification is in order here first. There are two ways of thinking about "returns". The price of bonds will drop if inflation goes up, so the "returns" will be negative during this period. But, as long as the bond issuer honours all payments, the bond holder will realize positive returns overall.

To see how this works, let's take a hypothetical bond that matures in 5 years that pays a 3% interest. The price of the bond is 100 today. Now, let's say interest rates goes up, and the price of the bond goes down to 94. Then, you'll have realized a negative return of 6%. However, let's say you hold the bond for 5 years, and the bond issuer honours all payments. Then in 5 years, the bond price would have gone back to 100, and you'd have received interest in the meantime.

So to answer your question, if you want to preserve your capital in the sense of realizing consistent returns in the future, you could invest your money in high quality bonds, such as the government of Canada bonds. If you have money in XSB.TO, then you already hold those bonds. The value of XSB.TO may go down from time to time as interest rates go up, but you'll always recover those losses in the end, provided the world doesn't go to pot.

If you want to avoid even the temporary price drops in bonds, you could buy money market funds, which are essentially ultra short term bonds. You could own them by buying the iShares Premium Money Market ETF (Ticker: CMR.TO). However, you'll receive less interest from that ETF than if you'd just put your money in a high interest savings account.

Jin

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Asked: Feb 08, 2018 06:03 PM

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