Negative interest rates; do you want risk, now or later?


Today there are more than 7 trillion dollars of government bonds world-wide with yields below zero. That means investors buying bonds and holding them to maturity won’t get all their money back (scary). There is some speculation that Canada and even the U.S. may be forced to follow the rest of the world and go down the negative interest rate road.

Now, a lot has changed during the past fifteen years since I wrote my final exam to become a financial advisor. A moderate –risk retirement portfolio back then recommended holding 60% stocks and 40% bonds. A client saving for retirement, had the ability to earn money on their cash at an above 5% yield on their risk-free Treasury bond portfolio.

This opportunity no longer exists and it may take another decade or more for interest rates to get back to normal.  It seems appropriate to wonder whether the 60/40 rule remains a prudent strategy. This is a really big problem for seniors, who don’t want to outlive their retirement savings someday. Life expectancy is rising in an environment where interest rates are falling. For example, my wife and I are retired and in our early sixties. There is a 50% chance that one of us will make it into our 90’s.

The great recession of 2008-09, taught me that volatility is not the true risk for investors saving for retirement or for seniors who are retired. It only took three years for stock prices to recover from their 2009 lows. The true risks are the permanent loss of capital and the possibility of running out of money.

Advice from 85-year-old billionaire, Warren Buffett

“It is true that owning equities for a day or a week or a year is far riskier than leaving funds in cash-equivalents. For the great majority of investors, however, who can and should invest with a multi-decade horizon, price declines are unimportant. For them, a diversified equity portfolio, bought over time, will prove far less risk than dollar – based securities.”

Are you afraid to take on more equity risk?

How about a hybrid equity called convertible bonds or convertible debentures. It’s a bond that pays interest but has a stock option hidden inside. It’s the best of two worlds, you get your money back plus interest and a chance to make a capital gain. Here is an example of a Canadian convertible debenture: Artis Reit 6% series F 2020 (AX.DB.F).

It was issued on June 30, 2010 at $100 paying 6% interest and the holder can convert into common stock at $15.50 any time before June 30 2020. The common stock was trading around $11.00 when this 10 year debenture was issued. The price of the common stock hit $17.00 by April 1, 2013 which if you converted at $15.50 would have generated a capital gain plus paid interest for three years.

A word of caution, the price of convertible debentures or bonds will trade above the $100 issue price if the common stock price is trading near or above the conversion price. There is a small quantity of the Artis series F still available but the current ask is $104.28 and the common stock price is $12.70 with only 4 years left. (Not a good buy today unless you are happy with the yield to maturity)

I have to admit that my tolerance for risk is much higher than the average senior. Plus I broke some investing rules, looking after my mothers portfolio. My 84-year-old mother is quite happy today that I invested 80% of her retirement account ($76,000) back in 2001 into equities. Over the past 15 years, my mother withdrew an average of $5,500 per year and she still has $67,000 today. There is no doubt that her retirement account would have run out of money using the old 60/40 rule or her annual income would have been seriously reduced.

Ask yourself or your advisor this simple question, “When should I take some risk, now or later?”

2 thoughts on “Negative interest rates; do you want risk, now or later?

  1. As I have not to worry about retirement yet, I would think: Risk is always there. As you show, with bonds, you risk to get back less due to the negative yield. A savings account risks to return less than inflation. Stocks risk to create a permanent loss, not a paper loss.


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