Canadians unprepared for rising interest rates

Almost 60% of Canadians with a retirement portfolio are unaware that a rising interest rate can erode the value of some of their investments, shows a new poll from CIBC Asset Management.

Read: How to cope with inflation, deflation and stagflation

Baby boomers are particularly in the dark, with 65% unaware of the impact of rising rates.

Rising rates can hurt investors who own bonds or fixed income securities because when interest rates rise, bond prices fall. An extended period of falling interest rates, and a flight to safety from equity market volatility has resulted in many Canadians investors loading up on bonds in recent years. But, most experts agree that this era of record-low interest rates has reached an end, says CIBC.

Read: How top managers find alpha

The poll also shows 54% aren’t thinking about changing their retirement savings strategy in a rising interest rate environment, with that number climbing to 62% for baby boomers.

Prepare for rising rates:

• Find the right fixed-income mix: Fixed income will remain an important part of investors’ overall portfolio mix, however diversifying into corporate bonds could be a favourable strategy in a rising rate environment.
• Consider “floating rate” investments: Unlike typical bond investments, the interest on floating rate loans rises with benchmark rates.
• Look at shorter bond durations: Duration is a measure of how sensitive the price of a bond is to changes in interest rates. The shorter the length of time for a bond to reach maturity, the less interest rate risk is involved.

Read: Bearing up with bonds

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.