The decisive aspects for bonds vs. GICs
When deciding which option to decide on, liquidity and ease are the 2 most vital considerations, says Koivula.
“If you buy a five-year GIC, your money is tied up for a long time, and a lot can change in five years,” he says. So for those who need access to that cash, if only to rebalance your portfolio and benefit from a stock market crash, bonds (or bond funds) are a better option.
But buying individual bonds may be confusing in comparison with investing in stocks. “For example, if you buy the common shares of Royal Bank or Fortis, they are all basically the same,” says Koivula. “In the bond market, a single issuer can have hundreds of bonds with different terms and conditions in circulation. It can get quite complex.”
For this reason, most investors who want to speculate in bonds spend money on bond funds.
There are exceptions, nonetheless. Some Canadian investors do not like the volatility of bond funds – even when it’s low in comparison with stocks. If rates of interest rise, the worth of your bond funds can fall and fall below the quantity you paid for them. On the opposite hand, for those who hold a single bond to maturity, you may expect to be paid back all your principal and interest. Another solution to the volatility problem is target-maturity bond funds, which hold a basket of bonds that each one mature at roughly the identical time.
Should you purchase bonds or GICs?
There are several other aspects that might influence the choice in favor of a specific investment.
Diversification advantages
GICs aren’t correlated with stocks, but bonds have historically been correlated with stocks. That means they have an inclination to rise in value when stock markets crash. Also, GICs are only available in Canada, but you may buy bond funds that hold bonds in U.S. dollars or other currencies. “In Canada, when stock markets fall, the U.S. dollar usually rises,” Koivula notes. So if smoothing out the ups and downs of your portfolio is a priority, bond funds could also be your best bet, he suggests.
Tax efficiency
Interest on most fixed-income investments (except preferred stocks) is 100% taxable outside of registered accounts. However, you may reduce your tax burden by buying discount bonds or bond funds that pay low yields and supply more return until maturity in the shape of tax-efficient capital gains that could be only half taxable.
