Common Cents – A Sound Strategy: Building Security into your Investment Portfolio

by Chloe Cross, BA, PFP, Financial Planner | BMO Financial Group, Sidney – 

Building security into your investment portfolio is a key component of a sound investment strategy. One of the best ways to boost the security of your portfolio is with Guaranteed Investment Certificates (GICs). Here’s how to make these highly secure investments work for you. Security and capital preservation are top of mind with many investors. While market volatility is an expected part of investing, there are steps you can take to minimize its effects and increase your overall portfolio stability.

Add Balance with Asset Allocation. One of the most important investment strategies is asset allocation – the process of determining the proportion of equity, fixed-income and cash-type investments you want to hold in your portfolio. Each of these asset classes plays a unique role in your portfolio, helping you establish a level of risk that you are comfortable with. Fixed-income holdings, for instance, can act as a stabilizing influence, offsetting the volatility of equities and providing capital preservation.

Diversify to Manage Risk. Once you have diversified by asset class, you need to diversify within each asset class. With the fixed income portion of your portfolio, you’ll want a mix of holdings that can reduce risks specific to fixed income investments, such as:
• Credit risk – the risk that the issuer will default on interest payments and return of principal.
• Interest rate risk – the risk that interest rates will rise, decreasing the value of bonds.
• Reinvestment risk – the risk of reinvesting your funds at a lower interest rate.

Consider GICs for Greater Security. Guaranteed Investment Certificates, issued and guaranteed by the financial institutions and insurable by Canada Deposit Insurance Corporation (CDIC), represent an ideal fixed-income investment for preserving capital. Most GICs pay a specified interest rate until maturity and some even offer flexibility to redeem early.

Keep Your Options Open. If you’re concerned about the direction of interest rates, consider escalating rate GICs. This type of GIC offers interest rates that increase at each anniversary, and you have the option to redeem your investment without penalty, on the anniversary date. This feature allows you to stay invested and be rewarded with a higher overall return, if interest rates should fall. And if interest rates rise, you can redeem your investment on the anniversary date – and reinvest at higher current rates.

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® Registered trademarks of Bank of Montreal, used under licence. This article is for informational purposes only. Investments should be evaluated relative to the individual’s investment objectives. The information contained in this article is not and should not be construed as investment advice to any party.

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