Real Return Bonds (RRB) and Treasury Inflation-Protected Securities (TIPS)

Real Return Bonds And Their Place In Your Future

First Published Date : October 25, 2009

With governments around the world insisting that their recessions are over and that the green shoots of economic recovery are now visible, there is an increasing line of opinion holding that there is no better time than now to start investing – or to call a halt to a self-imposed period of no investment – in order to see the benefits of this recovery period for all they are worth. However, caution is also a concern for many given how recent the recession’s lowest points were. At this time, a secure investment with a reasonable return is the absolute ideal for anyone looking to secure a bit of money for the future.

When it comes to secure investment, it is tricky to be absolutely sure of getting what you need for your money. While the economic indicators show that the recession has finished to all intents and purposes, buying shares at the present time is still a little perilous, with companies still having to make cutbacks to deal with the realities of a post-recession age. A secure investment, it must be said, is also an investment which is unlikely to bring a massive pay-off. High returns are still only likely from high-risk investments.

If you are in a position where a comparatively low return for no risk sounds like a good idea, however, then your best choice may well be a real return bond (RRB). Very similar in nature to the American TIPS (Treasury Inflation-Protected Securities), the real return bond is an investment which links your savings to the rate of inflation. As well as this interest is paid on the bond to the rate of interest. Practically speaking, this means that if you buy a $1,000 bond and at the six-month mark the interest rate is 4% and inflation at 2%, the principal of your bond will rise to $1,020 and you will receive a further interest payment of $20.40. As the interest rates climb, payments will continue to accrue based on the principal of your bond.

The important thing for an investor with an RRB is to hang on to it until it matures. If you do that, the realization price is based on the interest rate at maturity while if you sell it prior to maturity you will find that the price is based on the prevailing interest rate – and may be less than you originally invested. This poses problems for some, as the typical life of an RRB is thirty years. If you have the patience to wait this out then the return at the end can be considerable – although it is possible for the RRB to return less than face value if, over the life of the bond, there has been a net deflation.

The above warnings are simply worst-case scenarios however, as the fact of the matter is that should you invest in an RRB you will most likely be in it for the long run, and there have been almost no 30-year periods which have seen a net deflation in the market.

What RRBs should guarantee you is an above face value payout on maturity. This is useful if you are looking to support a future venture. With the 30 year life of most RRBS, many people buy them in their mid-thirties as a potential cushion for their retirement. As no-one is quite far-sighted enough to predict market behavior by the year for the next three decades, there is little benefit in assuming exactly how much you will get for a matured bond after it matures, but it is enormously unlikely to be any less than its face value and, with interest and inflation behaving normally, it can be considerably more.

Buying an RRB is something worth doing if you have a pot of money for investment and are content for it not to be liquid for an extended period of time. As long as you fit these criteria, it is an excellent way to feather your nest for the future. Most usually, the face value of a new RRB is $5,000, but there are many available for a lower price. There is also nothing to stop you from holding several bonds if you have the liquidity to invest in them. If you decide to invest in a real return bond, then your first stop should be the Bank of Canada website to consult the figures there for a bond’s “real yield” and “real price”. This will enable you to calculate the amount that you will have to pay for a bond, and how much you will get on maturity if the market behaves realistically.

Once you have gleaned this information it is time to call your broker and have a conversation, asking for information pertaining to the current and potential future benefits of buying the bond that you have identified. Once you are invested, settle in to see what the market has in store for you and be conscious that this is a long game.

As mentioned at the beginning, RRBs are not dissimilar to the American TIPS. It is possible for Canadians to cut out the middleman and directly purchase a TIPS from an American broker or the US Treasury. However, unlike an RRB, a TIPS bought from the US Treasury cannot be held inside a tax-sheltered account such as an RRSP, so it makes little sense to do things this way. It makes considerably more sense to buy direct from a broker. The major substantive difference between these bonds is that TIPS are guaranteed to pay out at least face value on maturity. Additionally, the US and Canada have different tax rules and regulations, so when deciding which you should buy it is beneficial to check the market rates in both countries.

Naturally, each possibility has its advantages and disadvantages, and the two countries will often see different economic performance over the course of an economic period. Both should, however, see you with a creditable return on your investment for very little risk.

Personal Finance Author Ahmed Dawn Picks Best Personal Finance Books

Top Personal Finance and Money Books

First Published: November 11, 2009

If you are a novice in the personal finance world and would like to broaden your money management knowledge, a good start would be to kick off your reading with a few timeless personal finance books. But how should you pick the first few books to read considering there are thousands of books written and available on the topic of personal finance?

Today, to make your life little simpler, I will give you a list of my top picks – 5 simple and easy-to-comprehend financial books to kick off your financial journey. One point to emphasize – don’t stop reading after finishing these 5 books. Your financial well-being depends largely on your financial knowledge. Always continue reading more financial books and literature to enhance your personal finance knowledge. Read, learn, and follow your financial roadmap to become successful financially. A Dawn Journal will provide you with great and reliable information to help you go through your financial journey.

Basic personal Finance Books

1. Your Money or Your Life by Dominguez and Robin

A very different type of personal finance book. It will give you a new perspective on life, work, and money. By working for someone else, we are trading our precious time for money. You could spend this time with your family or doing something you enjoy, rather than working for someone else and making them rich. That’s why working for someone else is making a dying – it’s not making a living. The authors show in this book how you can gradually switch from making a dying to making a living. I encourage you to read my full review here: Your Money or Your Life – A. Dawn Journal Book Review

2. The Millionaire Next Door by Thomas Stanley & William Danko

This book reveals how ordinary people can achieve extraordinary financial success by living below their means and practicing discipline. True millionaires don’t spend, dress, or act like millionaires and they have not inherited wealth or won lotteries. You can be a millionaire too by making smart money decisions and following proven steps other millionaires take mentioned in this book.

3. The Automatic Millionaire by David Bach

There is no shortcut becoming a millionaire. All you need is to use common sense to cut unnecessary expenses, pay yourself first, and make your financial life automated. Bach shows how you can put your financial life on autopilot and reach your goals without spending hefty time on money management. Bach is the guy who coined the term “The Latte Factor®”. What is The Latte Factor®? It just simply means that you cut on unnecessary small spending everyday and save or invest them to reach your financial goals.

4. Getting Loaded: Get Ready, Get Set, Get Rich by Peter Bielagus

Is it possible to become financially successful just by saving a couple of dollars a day? Peter Bielagus shows how to do it in this simple yet insightful book, step-by-step. The author discusses all you need to know about money and how you can use time on your side to build a strong financial backbone. This book is specially recommended for young graduates who are just entering the workforce and to anyone else who wants to be financially strong without having lots of money.

5. Invest Now by A. Dawn

This is a beginner’s guide to show you step-by-step how you can start investing for the first time with very little money. Although Invest Now is written for Canadians, the procedures mentioned would work in any industrialized country. Invest Now is written in very simple and easy language – avoiding all financial jargon. A must-read for those who want to know how financial markets and products work.

Bankrupt Nortel, Mutual Funds, and Invest Now

Stocks, Mutual Funds, and Your Financial Goals

First Published Date : January 22, 2009

In my book Invest Now I mentioned that mutual funds are a less risky investment product than stocks and really suit those who are looking to keep risks at a minimum. I always come across financial gurus and regular investors complaining about the cost of mutual funds. However, they always fail to mention that stock investors may lose all their money if they pick the wrong stocks, but mutual fund investors are very unlikely to lose everything even if they pick the wrong mutual funds.

Just look at what happened to recently bankrupt Nortel. At the peak of the tech bubble, this superhero was trading at $1,231. And now its stocks are worthless. Let’s say you put in $100,000 in Nortel stock a week ago, or a year ago. How much is your $100,000 worth now? Nothing. How about the same $100,000 invested in a mutual fund a week or a year ago? It’s hard to say how much it would have been worth now (based on what you bought); but you can say in confidence that you would not have lost all your money—although you may have paid $2000 fees. Which one do you think is better? Paying a few thousand dollars in fees and keeping your money, or losing all your money without paying any fees?

The problem with stock is that it is extremely hard to pick winning individual stocks. On the other hand, mutual funds are designed for average investors; as a result, it’s not that hard to pick a mutual fund with a moderate rate of return. However, you need to be careful so you don’t end up paying hefty fees. In Invest Now, I discussed how you can invest in mutual funds without paying lots of fees. Also, I emphasized low-cost index funds. Index funds are not actively managed funds: no portfolio managers run the fund. Index funds mirror the market performance of an index by buying stocks or other instruments that match the underlying index’s composition.

In order to be a successful investor and realise your financial goals, you need to avoid unnecessary risks and paying sky-rocketed fees. Mutual funds, especially index funds, can offer all these with minimal effort and time. Even when everything goes wrong, it is unlikely that you will lose all your money with mutual funds. However, such is not the case with stocks. Just ask investors across the globe that were holding Nortel in their portfolio; they will be glad to tell you, had they known it before, they would have held mutual funds. Even the riskiest fund on earth with the highest fees would not have wiped out all their money in one day like Nortel did.

Ten Common Bankruptcy Questions Answered

Information On Bankruptcies

First Published: Fab 11, 2009

The following article is for information purposes only. It is not intended to render professional and/or legal advice. Bankruptcy is a complex process. If you are having difficulty paying your debts and/or considering bankruptcy, I suggest you contact a Canadian Bankruptcy Trustee licensed by the federal government to discuss your situation. To find a trustee in your area, search on Google or Yahoo using these keywords: Bankruptcy, Trustees, Your Area.

What Is Bankruptcy?
Bankruptcy is a legal process that can provide you relief from unsecured creditors. When you file for bankruptcy, you surrender everything you own to a trustee in bankruptcy. In return, all your unsecured debts are discharged and you get a chance to start a new life.

How Do I Declare Bankruptcy?
A bankruptcy can be filed through a trustee in bankruptcy. A trustee in bankruptcy is a licensed individual to administer the bankruptcy process. The Office of the Superintendent of Bankruptcy (OSB) licenses and regulates trustees.

What Happens To My Debts When I Declare Bankruptcy?
Bankruptcy discharges you from unsecured debts. However, there are some debts that stay.

What Unsecured Debts Go Away?
Here are some examples:

– Payday Loans
– Credit Card Balances
– Unsecured Line of Credits
– Unsecured Personal Loans
– Unpaid Utility Bills
– Retail Store Credit Card Balances

What Debts Are Not Discharged?
Here are some debts that are not discharged:

Alimony Payments and Child Support
Student Loans (various rules and regulations apply, consult a bankruptcy trustee for more info)
Fines and Most Court Ordered Restitution Payments
Certain Government Overpayments
Debts That Arose as A Result of Fraud or Theft

Please note that whether or not a debt is discharged can be complicated. Rules can change anytime as a result of court rulings. Also, The Court has the right to refuse a discharge. Consult a bankruptcy trustee for more information.

What Happens To My Secured Debts?
Secured debts, debts secured by properties or assets, such as mortgages and car loans, are not discharged.

How Long Bankruptcy Lasts In Canada?
In general, your bankruptcy ends when you receive a discharge. Discharge cancels your debts, and it could take minimum nine months to get a discharge. However, bankruptcy court can order to extend your bankruptcy under certain circumstances.

How Long Bankruptcy Stays On My credit Report?
It depends on various factors. In general, it will remain on your credit report for six years. A second bankruptcy will remain on your credit report up to 14 years.

What Can I Keep In Bankruptcy?
You will be able to keep some assets. These are called “Bankruptcy Exemptions.” Bankruptcy is governed by federal law, but The Bankruptcy Exemptions (what you can keep) is legislated by the provinces and territories. In Ontario, you can keep the following:

– Clothing, jewelry etc up to a value of $5,650.00
– Household goods up to a value of $11,300.00
– Tools you use to earn your living up to a value of $11,300.00
– Motor Vehicle up to a value of $5,650.00

Check with your own province or a bankruptcy trustee to find out what you can keep in your province.

Does My Bankruptcy Affect My Spouse?
Contrary to popular belief, it does not affect your spouse. You are responsible for your own debts; your spouse is responsible for her/his debts. However, if your spouse co-signed for a loan or joint on your accounts, she/he may be affected. These issues can be complicated. Consult a bankruptcy trustee for further clarification.

Bonus Question

What Happens To My House When I File For Bankruptcy
If your mortgage is paid off, or if you still have mortgage but you have a lot of equity in your house, you cannot keep your house.

If your home has no or little equity, and you are able to keep up with your mortgage, you may be able to keep your house after filing bankruptcy.

Again, these issues can be complicated. Consult a licensed professional for further clarification.

NB – In Canada, Office of the Superintendent of Bankruptcy (OSB) protects the integrity of the bankruptcy and insolvency system and ensures public confidence in the marketplace. Visit their website for more information.

How to ride out market volatility

How to ride out market volatility

First Published: Aug 7, 2008

Unless you are living under a rock these days, you're concerned about the recent market turmoil. Investors all over the world have been losing chunks of their portfolios every day. I remember that I stopped looking at my portfolio at some point and since then I have been checking it very infrequently. Poll after poll shows that the majority of investors are pessimistic about the future and they are making changes in their portfolios based on emotion and fear, not based on a calculated decision.

The most common action they are taking? Switching out of equities and parking money into money market products. Equities are at their lowest at this time and switching out of equities may cost you a lot more than you can possibly handle. It is never recommended to get rid of equities when they are at a heavy loss. Now, naturally, you are going to ask, "If we're not to get rid of equities, what could we do to ride out market volatility?" My number one suggestion would be: do nothing. Yes, indeed – do nothing. Just sit back, relax, fasten your seatbelt, and ride out the market volatility.

If you are not convinced yet, consider the following points:

  • Diversification is the key to achieving stable returns throughout the good and bad times. A well-diversified portfolio should not fluctuate to the same degree as stock markets.
  • Volatility is a normal part of investing. There will always be ups and downs in the market. Do not let market volatility divert your focus away from your goal. Stay invested, keep adding more money, and you will be fine in the long run.
  • Investment is a discipline. Do not make decisions based on emotions. Research has shown that the stock market has averaged an annual 11% rate of return over the last 120 years. Stay invested for the long run – through good and bad times.

I would like to end today's article with a quote by legendary investor John Templeton. John Templeton recently died at the age of 95. He was famous for this quote: "Buy at the point of maximum pessimism." Templeton's quote makes perfect sense—whenever there were declines in the market, the market eventually recovered with greater gains. Investors who acted emotionally lost the most. That's why my advice is: Do Nothing. The market will recover and you will be in good shape again. Just be patient and ride out the volatility.